The government’s recent budget announcement has dominated headlines in recent weeks, with investors concerned about what the reforms could mean for their wealth creation plans.
In a recent Senate submission, Momentum Wealth founder Damian Collins said that in their current form, the changes to negative gearing and the capital gains tax discount could have significant ramifications for the nation’s property market.
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He said the changes would fail to meaningfully increase housing supply, reduce investment into both residential and commercial real estate, and drive rent values higher.
Instead, Collins recommended that the government utilise a staged phase-out over a 10-year period rather than an immediate restriction or a switch to a capped passive loss model, as seen in the US.
He said that a 10-year strategy would provide investors with more time to adjust their strategies, while allowing investors to continue to deduct a portion of their rental losses against non-passive income.
“If changes are to be made, a more gradual and targeted approach would better balance fairness, housing affordability, rental supply and productive investment,“ Collins said.
“The Committee should consider amendments that reduce short-term disruption and preserve incentives for investors to provide rental housing and commercial property, fund new supply and take the risks required to improve Australia’s residential and commercial property stock.”
The residential supply equation
Collins said that while Australia’s residential sector has typically delivered lower yields than commercial assets, investors have often accepted the trade-off in favour of greater growth potential and the ability to offset losses.
“The proposed restriction will materially change that equation.”
He said there was no guarantee that investors would pivot from established homes to new builds, and that those who did would likely be increasing supply in areas that lacked the fundamental amenities tenants demanded.
“Most tenants want to live in established areas, where amenities are better. Some investors will simply not enter the market and thus not contribute to new supply.”
“The assumption that investors displaced from established housing will simply fund additional new housing also overlooks the current capacity constraints of the construction sector.”
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Collins said that the changes to property taxation would likely reduce the pool of investors in the market until rents rose enough to restore an adequate yield.
Deterring risky investments
Collins said that investors should be incentivised to take on the risk to increase housing supply, rather than punished for doing so.
“Investors require a premium for taking additional risk. If that premium is reduced after tax, rational investors will allocate less capital to higher-risk, higher-growth projects.”
He said the likely result would be a reallocation of capital across real estate markets, leading to less investment in development.
Similarly, he said it would reduce the appetite for growth-dependent projects and decrease the amount of private capital available for new or improved commercial premises.
“Australia needs more housing, more productive commercial space, more urban renewal and more private capital willing to take development and other risks.”
“Tax settings should not unintentionally penalise the very projects that add capacity, improve ageing assets and support business growth,” Collins concluded.