Election 2016: $126 billion hit to housing market if negative gearing scaled back, report reveals

A REPORT into negative gearing will confirm that making changes to the investment incentive will cause property prices to fall by around two per cent.

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SCALING back negative gearing could wipe $126 billion off Australia’s $6.3 trillion housing market.

An extensive report into negative gearing and capital gains tax, to be released by the Grattan Institute today, will confirm that making changes to the investment incentive will cause property prices to fall by around two per cent.

The report comes as negative gearing is shaped as an election defining issue.

The report concedes changes would lead to a two per cent decline in property prices but argues rental prices would not be impacted.

Labor plans to restrict negative gearing to new homes and slash capital gains tax discount from 50 per cent to 25 per cent after July 1, 2017. It claims the changes would improve the bottom line and make it easier for young Australians to enter the property market.

Prime Minister Malcolm Turnbull ruled out making changes to negative gearing on the weekend insisting housing prices would plummet and weekly rentals would skyrocket.

“Reduction in the CGT discount and changes to negative gearing will affect investor demand, rents and property prices,’’ the report says.

“The extent to which investors will vacate the property market will ultimately depend on how much post-tax returns fall, and how sensitive investor demand for property is to changes in returns.”

“Economic theory suggests that higher property taxes and reduced investor demand will lead to some combination of higher rents and lower property prices.”

Despite the decline in house prices, the report backs reform to negative gearing and capital gains tax, claiming it would improve the budget’s bottom line by $5.3 billion a year. That includes a $3.6 billion in savings from capital gains changes.

It does deviate from Labor’s plan, urging halving the discount on capital gains over a 10 year period rather than an instant reduction.

Prime Malcolm Turnbull and Opposition Leader Bill Shorten after the 2016 Anzac Day National Ceremony at the Australian War Memorial in Canberra yesterday / Picture: Kym Smith

It would also scale back negative gearing across all properties so that rental losses could only be offset against other investment income.

The report concedes changes would lead to a two per cent decline in property prices but argues rental prices would not be impacted.

“Our best estimate is that the changes we recommend might lead to property prices up to 2 per cent lower than otherwise.”

It argued that while economic theory suggested that prices would drop and rents would increase the policies would have only a modest impact.

The report claims negative gearing distorts the housing market and favoured the wealthy over the working class.

“The increase in geared investing has made it harder for prospective owner-occupiers to afford to buy homes. Investors now account for more than half of new loans for

housing, up from 29 per cent two decades ago,’’ it said.

“The interaction of a fifty per cent capital gains tax (CGT) discount with negative gearing distorts investment decisions, makes housing markets more volatile and reduces home ownership. Like most tax concessions, these tax breaks largely benefit the wealthy.”

On Sunday, Prime Minister Malcolm Turnbull insisted housing prices would drop and rental prices would increase.

“Labor’s reckless changes will reduce property values; they’ll devalue every home, every property, in Australia,’’ he said.

“They’ll result in increased rents because they will reduce the number of rental properties available.”