Just in time: Why Chalmers had to pull the plug on any changes to negative gearing

Federal Treasurer Jim Chalmers has scuttled speculation of changes by the government to negative gearing and capital gains tax, as the market softens.

Melbourne house prices are headed for a 3 per cent fall this calendar year. Picture: David Crosling

The prospect of weaker home values, coupled with fresh election woes explains the timing of an effective tax freeze by the government across the property market.

After weeks of being told any changes to existing tax polices would choke the already limited supply of new rental property, federal Treasurer Jim Chalmers has folded, saying: “We are not going down the path of changing the negative gearing arrangements or abolishing capital gains tax discount because we have not been convinced that would have positive consequences for supply.”

The statement about what will now be seen as a short-lived scare, comes just in time – allowing the government a pathway to the federal election with the two key tax breaks available to everyday investors in place.

Speculation that changes were in the wind followed a review inside Treasury of the tax settings. Since the review was made public in mid-September, the residential market has softened, especially in Melbourne and more recently in Sydney.

Federal Treasurer Jim Chalmers has backed away from changes to CGT and negative gearing. Picture: Martin Ollman

While several cities such as Perth and Adelaide show strong returns, investors have kept away from the larger cities as a long-awaited drop in interest rates from the RBA has not come to pass and the majority of economists now predict a cut will not be on the cards until mid 2025.

Prices in metropolitan Melbourne are now going backwards, falling 2 per cent over the past year and there are early signs that Sydney prices are under pressure. According to CoreLogic prices in Sydney were flat with zero change over the past month and clearance rates in Sydney are shrinking steadily towards the 60 per cent mark.

Forecasts from the Bank Of Queensland are that Melbourne will end this year at minus 3 per cent and Sydney will see price growth at 6 per cent, which would be less than half the 13 per cent notched up in 2023.

The decision by the government to effectively freeze property taxes gives investors in the residential market a clear line of sight after weeks of uncertainty.

It has also been echoed by the refusal of regulators to budge on mortgage buffers. The ruling which demands that lenders add 3 per cent to the headline rate when assessing home loans is now unlikely to change after the “big four” banks publicly split on the issue.

(The buffer means a borrower applying for a 6 per cent home mortgage is assessed on their ability to service a 9 per cent mortgage).

Prudential regulator APRA seized the opportunity to flatten any speculation that the buffer rules would change when CEO John Londsale recently told a parliamentary committee “3 per cent is a prudent number”. In fact, the rebuttal was strongest yet from APRA because it insisted the policy was not exclusively linked to interest rate settings. The regulator says it is in place to buffer against any “economic shock”.

The argument against the buffer had largely been based on the notion that rates are about to drop, so there was a case to drop the buffer as well.

Negative gearing is whereby property investors can declare losses against tax. Capital gains tax discounts are whereby property sellers can get taxes halved if they hold the property for more than a year.

Politically, any move on property taxes is extremely difficult. The most recent example comes from New Zealand when the former Ardern government cut property tax incentives and the volume of investment funds entering that market had halved three years later.

New Zealand’s current government has since progressively reversed the changes.

Originally published as Just in time: Why Chalmers had to pull the plug on any changes to negative gearing