New property hot spots loom if Labor Party wins 2016 election

The alarm bells are ringing loudly on negative gearing: what will its removal do to the market if Labor wins?

The alarm bells are ringing again on negative gearing: what would its removal do to the market if the ALP win next Saturday?

For investors the questions are what would happen to property prices and who would win or lose should Labor leader Bill Shorten get his way with restricting negative gearing to new properties.

The ALP will also couple a negative gearing crackdown with a cut in the capital gains tax allowances in property investing.

Remarkably, despite the mountains of angst-ridden commentary on the subject throughout the last week, there is absolutely no firm consensus on what the ALP changes would mean for the wider economy.

A very good example of this was a widely discussed report from the reputable SQM group, which said prices would fall by an accumulated 15 per cent out to 2018.

I don’t know about you, but any forecast that goes further than one year is fanciful in my book and I expect a lot of property investors would agree.

The issue that is undervalued in the debate — though not among investors — is that property investing for almost everyone offers three elements of value:

1. The potential for capital appreciation over a long period of time. A report a few days ago from Russell Investments showed ­residential property was the best investment by a big margin over the last decade in Australia, with an annual return of 8 per cent a year in the decade to December 2015.

2. The potential of income in the inner parts of metropolitan centres. This has waned considerably. Gross rental yields can be as little as 3 per cent or less. Still, with cash rates at 1.75 per cent, it remains a keen proposition.

3. The value of a tax write-off. For most salary earners negative gearing is the only significant tax break apart from superannuation. There are two million private property investors and a whopping 60 per cent of them claim losses (ie tax breaks) every year.

Under the ALP regime it has to be assumed that if a population of 25 million can boast two million property investors, then restricting negative gearing to new properties is going to create a major distortion in the market. How might it play out?

Cameron Kusher, senior research analyst at property group CoreLogic, points out that one of the first difficulties is the dearth of decent data on new properties: Kusher says CoreLogic has to assume ‘‘new’’ to be properties that have never been resold — so a house bought 10 years ago but not sold since would still classify as new … there’s an issue straight away. More pertinently, Kusher notes that the legion of investors currently invested in property — for income, capital and tax purposes — will review the landscape, looking for new properties that offer good opportunities if the ALP wins.

Kusher reveals some fascinating working in the accompanying table, which shows the premium investors will pay for new properties in each city.

The premium is the percentage increase in price investors are willing to pay for a new property over an existing property of similar proportions in a similar location. Note the wide disparity in the numbers explained by very different local factors: Brisbane’s mighty 14 per cent premium is explained perhaps by the relatively new trend towards inner city density which has been tracking in Sydney and Melbourne for two decades.

But why is Sydney’s premium a multiple of Melbourne? “Every city has a different potential explanation, ” says Kusher.

If we assume that investors swing towards new property — and the majority of them want property in the inner city, not the outer suburbs — we’d have to ­assume those premiums could only rise further.

Just consider this: if the driver of tax advantage is restricted to new properties then an investor in a new property can get tax relief on salary and maximum depreciation allowances combined.

But here’s the rub: analysts believe the desire for a tax break ­coupled with the enduring appeal of property investment will ­initially lift activity in the inner city but ­analysts also warn the crucial issue will be resale value.

In other words, you might buy the property because you get negative gearing allowances on what is a “new property” but when you go to sell that property the next buyer is not allowed to negatively gear on that same property: one of the three prime values of investing in Australian property is removed.

That’s when even the smartest property investor is going to find themselves exposed to a new risk … and nobody has done the numbers on that one.