Pulling the property market strings

It’s had a solid run, and now it seems the Australian property market may have finally hit a critical juncture.

There’s a growing chorus calling for a Federal Election, and investors may be circling the month of May 2019 on their calendars. In the lead-up we’ve seen Opposition Leader Bill Shorten double-down on his case for changing negative gearing policy and removing refundable franking credits.

Property has become a matter of political football in the last couple of years, with even our regulators stepping in and our banks acting independently.

The Australian Prudential Regulation Authority (APRA) was credited last year with orchestrating a ‘soft landing’ for the housing market through introducing macro-prudential measures to curb lending. Australia’s Big Four banks also took it upon themselves to raise rates independent of our central bank, making it harder for investors to check out in the loan process.

But for all that has already been said and done, the biggest property string may not yet have been pulled.

Looking at the medium-term, our Managing Director, Philip Ryan has identified a ‘base case’ scenario and ways this could play out for property investors.

A ‘base case’ scenario

Philip thinks international implications are less relevant to Australian investors in this sense and the focus should be on what’s happening domestically.

“If Labor does get in and change negative gearing/capital gains tax, it won’t help the property market,”

“You can only think that further tax restrictions placed on the industry will not have a positive impact.”

Any significant movement may cause a major shakeout and trickle through the rest of the economy. Philip notes how everyone is trying to make their mark on the much-talked about Australian property market, which accounts for almost 70 per cent of household wealth.

Philip acknowledges it may be an appropriate aim to make housing more affordable, however, it’s hard to draw a line between cause and effect.

“My concern is that if your political aim is to make housing more affordable, you may achieve that by driving house prices down, but the consequences of this will be that people will not buy property if they perceive prices will drop.”

“There are flow-on effects, for example if housing becomes more affordable, that’s positive for a first-home buyer, but for a renter it may be quite devastating if rents increase because of a decreased supply of property available for rent.”

This was put in black and white terms in Christopher’s Housing Boom and Bust Report 2019 issued by SQM Research late last year: “Any change to the negative gearing rules would significantly cut demand for investment property and therefore dent property prices. No doubt about it.”

Renters caught in the crossfire

SQM Research notes that Australian investors currently underpin about one-third of all residential property purchases. Based on simple rules of supply and demand, Philip says with less investors in the market, then rents will actually go up.

The great Australian dream of homeownership may still be real, but Philip believes those who dream a different dream will be affected too.

“There is a whole sector of Australians who really have no intention to buy a house,”

“Rents at the moment against the capital value of property really aren’t that high. Investors may be getting a 4 per cent return, and when you take out rates, land tax and other costs, that could be 2-3 per cent — if you change the rules on negative gearing and capital gains tax, there is little incentive to buy. This will impact supply.”

Rents need to go higher, for investors to come back, but they will also take into consideration that negative gearing and taxes have changed. I don’t think enough attention has been paid to the psychology of buying a property.”

A different stimulus?

With policy being a balancing act, Philip suspects a first-home buyer stimulus may be used to try and offset any negative impact. It wouldn’t be the first time.

On the Labor side, in 2017, Victoria’s Andrew Government introduced a stamp duty exemption for first-home buyers purchasing properties valued up to $600,000 plus stamp duty concessions for homes worth up to $150,000 more. This boosted first-home buyer demand and supported the Melbourne market through to the end of 2017.

On the Liberal side, NSW’s Berejiklian Government did similar last year, exempting stamp duty on properties valued up to $650,000, and discounting for those valued up to $800,000.

Philip suspects, if we see a change in Federal Government, they too will try and target first-time market goers. But he thinks it’s the developers that should be watched more closely.

“The key in making property more affordable is to develop more property, thereby increasing supply”

“In the current property environment however, there will be less stock coming to the market as developers find it harder to obtain finance. If rents ultimately do increase through decreased supply brought on by changes to negative gearing and capital gains taxes, then paradoxically we could be serving the deeds for the next property boom.”

There’s no denying that the Australian property market will be one to watch throughout 2019 however, investors can have piece of mind know these potential market movements all form part of the property cycle clock.

Gain further insight into investing in the Australian property market by checking out the latest edition of Angle Magazine.