ABC finance guru Alan Kohler has warned that Anthony Albanese’s changes to negative gearing and capital gains taxes will make housing a terrible investment.
He said that falling immigration and an increase in housing construction should result in a surplus of homes for at least a while.
‘Immigration is falling and housing starts are rising as a result of the housing accord (albeit less than the target), which should result in a surplus of housing for a while at least,’ he said.
Combined with higher interest rates, this surplus is already causing house prices to decline in Melbourne and Sydney, and to slow elsewhere.
‘The effective increase in CGT and removal of negative gearing for established dwellings should accelerate it.
‘At best, house prices will probably stay roughly where they are for a long time, maybe even two decades as Macquarie predicts.
‘The good news is that this will make housing more affordable. The bad news is that it will be a terrible investment, and a nightmare for those who have stretched themselves to invest in it.’
Kohler said he had become more optimistic that the long-running housing affordability crisis could finally be easing, but warned of significant financial strain for recent buyers.
Finance guru Alan Kohler warned investors to brace themselves for a ‘nightmare’
He said changes to negative gearing and the capital gains tax would make housing more affordable, but at a detriment to those wanting to invest
‘For the first time since I started covering housing affordability as a national disaster, I’m optimistic that the tide has turned and that residential real estate will indeed be a poor investment, possibly for decades, which means affordability will gradually improve,’ he said.
‘But there is a dark side to this. A generation of young families who bought a house recently using too much debt, but hoping, fully expecting, to build equity and wealth, will be devastated.
‘They are facing the loss of whatever equity they now have and a lifetime grind of principal and interest.’
Home price growth was already slowing nationwide, with outright falls in Sydney and Melbourne following three straight Reserve Bank rate hikes.
Meanwhile, over the weekend, the share of homes successfully sold at auction fell to its lowest level since April 2020, when the pandemic began.
Kohler’s comments come as Morgan Stanley analysts warn that changes to negative gearing and capital gains tax concessions in the federal budget could cause housing prices to fall by up to 10 per cent.
Even though the fall in investor demand will be partly offset by growth in owner-occupier activity, Morgan Stanley sees a five to 10 per cent drop in national prices as likely, ‘taking into account the soft starting point for housing with RBA rate hikes’.
That would be one of the largest price corrections over the past 40 years, the analysts wrote.
Mr Kohler questioned if the tax changes are the hill Albanese and Chalmers want to die on
‘Larger declines could come from more fundamental changes in investor price expectations or a slower than usual policy response.’
Negative gearing allows property investors to deduct losses on their investment property, such as interest payments and maintenance costs from their overall taxable income.
This strategy is typically used when rental income is lower than the costs of owning the property.
Existing investment properties that are negatively geared before Budget night will be ‘grandfathered’, meaning their current tax treatment will continue.
Homeowners who live in a property before Budget night will also be able to negatively gear it if they later turn it into an investment property.
Labor will also scrap the current 50 per cent capital gains tax discount and replace it with a new system based on inflation. This means only profits above inflation will be taxed when assets are sold.
Currently, investors who hold an asset for more than 12 months can halve their taxable capital gain.
Under the new model, that automatic 50 per cent discount will end. Instead, the asset’s original purchase price will be adjusted for inflation, and tax will be applied only to any gain above that amount.
The reforms will also introduce a minimum 30 per cent tax rate on inflation-adjusted capital gains, so investors cannot reduce their tax bill by selling assets in low-income years.
