Supply, Demand And The Federal Election - What You Need To Know

If you have tried to invest in property in the last 18 months you have probably found it quite a difficult experience.

With all the attention on the banks during the Royal Commission, it has been extremely difficult for existing or first-time investors to access funds to enter the market.

As a result of these lending constraints, it is no surprise that the property market has started to fall in most major cities of Australia. When you dry up the funding there are fewer buyers in the market and therefore less pressure on prices.

It’s a rather simple formula of supply and demand.

Now normally in a scenario of falling prices I would be suggesting that it is a great time to be in the market. It’s almost like the Boxing Day sales, everything is discounted. There have to be some good bargains, right?

But right now is different. There is something else happening that adds considerable caution to the property investing proposition.

The federal election!

So now that we have entered into a federal election campaign, where property investing is a key election issue, it is no surprise that as property investors you are even more concerned about the future for your existing and potential future investments.

There are some key policy proposals that will impact the future of property investing in this country…and let’s face it, they have the potential to dramatically impact more than just property investor’s, but more about that later.

The Labor Party of Australia have released some detail of their planned policies that relate to negative gearing and capital gains tax.

The first and more simple of the proposed changes is the halving of the capital gains tax discount for properties held for more than 12 months. Under the current rules, a property investor is entitled to a 50% discount on the gain made when selling an investment property. This would be reduced to 25% under the proposed changes.

This policy was originally introduced on the basis that it would encourage more investment in new property developments. The current argument being that it hasn’t had the desired effect. 

Since I am a big believer in holding for the long long term, this isn’t a biggie, for now.

The second and more significant proposed change is in relation to negative gearing. The Labor policy is to remove the tax benefits of negatively geared property on all but new housing purchases.

It is important to note that existing investments will be grandfathered to allow deductions to continue to be claimed for purchases made prior to these changes. That’s about the only good news for the existing 1.3 million property investors.

At this stage, no other political party is proposing to change the existing legislation relating to negative gearing or capital gains tax.

You will recall earlier that I mentioned as prices were falling it normally would be a good time to be looking for investment grade properties…

But with the uncertainty created by these proposed changes, it is understandable why people would be less inclined to be investing right now.

I have seen a lot of data relating to these changes, and there is not a lot that would excite property investors.

The simple truth is, that without the benefits of negative gearing, a large pool of potential buyers will disappear from the market. So not only will property prices continue to struggle, but for those investors with properties that are negatively geared, their ability to attract good prices in the event that they were a seller will also be impacted.

The changes proposed by Labor are being promoted on the basis of making properties more affordable for first home buyers.

A recent report from SQM Research, investment advisers specialising in property investment, indicates that property prices will fall nationally by between 5 and 12 per cent by 2022 if Labor scraps negative gearing.

This makes sense, since investor’s will need properties to be discounted to some extent to offset the removal of the tax benefits previously available.

The other consideration is rent.

If an investor can’t get the discount required to make the numbers balance, they will need to seek higher rents to cover the costs of holding the property.

This will therefore flow on to all rental properties, making first home buyers, who by extension are likely to be renters prior to being buyers, to have less funds available to buy. A rather circular argument don’t you think?

In a poll of more than 1,000 people taken by Newgate and commissioned by the Property Council of Australia, it showed that 33% of potential investors said they would buy a newly built property under existing tax arrangements, but that number dropped to 24% if the proposed changes were introduced.

A similar result was found when surveying existing property investors.

What is the significance of this data you might ask?

Well, the changes are being introduced to make housing more affordable, which is supported by new housing supply and construction. The supply and demand equation again!

However, if there are fewer buyers, it is arguable that the new supply will not be there. Construction projects rely on buyers. Without the buyers, supply dries up, which as we know forces prices back up.

The reverse effect to the one being sort by these changes.

The flow-on impact to the economy could be significant. Any reduction in building developments means less jobs and less economic activity to help the economy grow, which brings the ‘R’ word into the equation – recession! Now that might be a little alarmist at this stage, but it is possible.

So you are now probably asking, what are the chances that the changes will be implemented. If you follow opinion polls there is a very good chance that Labor is going to win the election. I’m not into picking election results or even following opinion polls at this time of a campaign, things can change very quickly, remember John Hewson and the unlosable election???

However, there are cracks appearing in the Labor policy.

Recent analysis by Ben Kingsley of Empower Wealth, Danielle Woof of the Grattan Institute and Mike Mortlock from MCG Quantity Surveyors all suggest that the savings proposed by Labor could be overstated by between $2.5 and $8 billion.

If that is the case, then you can expect a great deal more scrutiny of the numbers when they are eventually released, most likely just before election day.

That makes things rather uncertain for all of us and places the value of your existing portfolio on a knife edge, and more than likely will dry up the investor market until at least some time after the election where it becomes clearer what is happening with these changes.

Which all leads to more softness in property prices in the near term.

I suggest keeping a close eye on both political parties to see how they manage this issue, and how the conversation pans out over the campaign. Labor have been consistent in their determination to make these changes, but the pressure as election day looms could change everything.

Stay tuned, it’s an important time for property investors.

Andrew Woodward is a mindshift.money accredited money coach based in Sydney who teaches people to take control of their money and invest for their future, simply and efficiently. Sign up for his free weekly money tips at theinvestorsway.com.au.