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Ben Kingsley Blog post by Ben Kingsley

Labor’s Negative Gearing Policy Blunders (Part 2)

This video is part of our Negative Gearing video series.

You’re currently watching Video 3.
Video 1: What is Negative Gearing and Why It’s NOT a Strategy? – Watch here
Video 2: Labor’s Negative Gearing Policy Blunders (Part 1) – Watch here


Hi Ben Kingsley here. In part 2 of this series of Labor’s Negative Gearing Policy Blunder, I’m going to explain to you why we think not only rents are going to increase but also property prices are going to fall. This comes down to the concept of demand and supply.

Let’s have a look. So here, we have a price axis and we have a quantity axis here. In theory, what you’ve got to understand that when there are high demand and low supply, prices go up. When there’s high supply and low demand, property prices or value goes down. We have this curve here that indicates demand and then we’ve got this curve here for supply. When a property market is in balance, they call that equilibrium or any type of market in balance, they call that the equilibrium.

Now understanding that concept we need to go back and have a look at our buyer behavior and what’s going to happen in terms of demand assumptions. In a lot of the modelling, people who think that there’s not going to be a lot of significant change they’re assuming that the investors are going to keep doing what they’re doing. Problem with that is the investor is looking for a return on their investment and ultimately they can choose to invest in property or they can choose to invest in alternative investments to get the best bang for their buck. So if we think about it like this, we still think that the 70% of owner-occupiers will stay in the market and they’ll continue to buy their mixture of new and existing properties.

But the challenge of what we saw in part 1 of this video series is what do these 30% investors do now? We learned in Part One that effectively 45% of them are currently buying new property and 55% of them are buying existing property. Why are they buying existing property? Well in a lot of cases they’re buying existing property because it gives a better return than the new property does. In fact, there was some research that came through from BIS Oxford Economics. What they found is when you’re buying high-rise off-the-plan apartment, and this has been the performance in the last few years, since 2011, we saw in Melbourne that out of those people who bought off the plan apartments, 66% had zero or negative equity. Meaning they’ve made a loss. That is our problem.

That’s basically two out of three.

Now when we look at the Brisbane market, we saw in almost one in two. 48% had zero or negative equity. Zero or negative equity! 48%! One in two. Melbourne is two out of three. Now since 2015, what you’ve got to understand is this was a booming property market in Sydney at the time in terms of their off-the-plan purchase. So our good friends in Sydney also experienced 23%. One in four had zero or negative equity.

Now let’s put that into context here. Of those 45% who have bought, a lot of them aren’t going to experience very good returns. The smart investors who have bought the 55% of existing, they’re actually going to do okay in terms of their returns. So if we think about that, what’s the demand of this?

Effectively half or thereabouts, what are they going to do? Where are they going to divert their money? Are they going to go into shares? And then that effectively reduces the demand for property.

Of those people who might potentially decide, “No I want to buy new”, well the results aren’t great. And once that message gets out there and it becomes common knowledge that investing in new stock and off the plan stock doesn’t deliver good capital growth or good returns in general, they might also decide to deploy their money elsewhere. And the Labor understands this and the reason why we know they understand this is because as part of their property policy offerings, they’ve got a thing that they’re doing called Build to Rent which is an initiative for the big end of town big business to start investing in building stock for renters. Now because they understand that if the demand pulls away, that’s where you’re going to see property prices fall. Secondhand properties will exist under Labor’s policy whereby once they’re not new, no one will necessarily touch them. So we’ve got this big fall away of demand and that’s putting pressure on prices and that’s why prices will fall.

If you think about it, 30% of the marketplace. If they decide to go or a lot of them decide to get out, that’s where we’re going to see an issue in terms of prices. Now there will be still some smart money that goes into some good existing areas where land is tightly held and it’s in limited supply which will get good capital growth, for those people looking for existing and can afford to supplement that. Understanding negative gearing means if the government’s not going to help you in the short term, you’re going to have to provide that surplus income yourself to cover those losses in the earlier stages but let’s circle back here.

This Build to Rent initiative from the Labor Party is offering a 50% tax break. So the big end of town is going to get a tax break of 50% off! Yet the mum and dad investor, they’re going to get a tax hike in terms of capital gains of an additional 50%. Not sure that’s fair if Labor’s talking about a fair go.

Now the reality of that though, is that they need to understand that there are literally tens and hundreds of thousands of people around the country coming and going in terms of the rental pool. So this Build to Rent policy, what are they going to build? Well, they have to build volume because the economics won’t stack up for them in terms of just building one house here, one house there. They’re gonna build medium and high density Apartments. So the reality for people is that the demand for these rental properties is going to get contracted. If you think about it, demands are going to go high for rental as supply starts to dwindle. Anyone who wants to live in a house or a townhouse, they are potentially going to pay higher rents but if you want to go live in one of these high-rise apartments that potentially could be oversupplied, we start to break down the different market segments. You might get cheap rent there but you may not want to live there. And if you’re a family, these types of properties may not necessarily accommodate you as a best fit so who’s going to provide that accommodation if the investors have gone?

That’s what you normally see and that’s why we saw during the 1985 to 1987 period when negative gearing was abolished. We did see in terms of the absorption of rental, the rental stock at the time was starting to absorb. Vacancy rates were dropping and rents were starting to go up. That was certainly the case based on the REIA’s data, the Real Estate Industry Association of Australia. It wasn’t perfect across every capital but it didn’t really have enough time to mature so there are people out there arguing that rents didn’t go up everywhere. Yes but if you start to see vacancy rates coming down and certainly for houses, there was a real spike in terms of demand, rental price is going higher. We also saw through some data from SQM research that construction fell by 27%. That’s again an indication when you think about it, if 45% of all investors are currently buying new, they are already adding to that pool. Now Labor is telling us they’re going to move this, incorrectly with wrong data, they were going to move this from 7% to 22% to get their spike in construction.

That’s not going to happen either.

So this is the other challenge that Labor has with their policy. It changes buyer behaviour. Investors are getting smarter, they’re more informed with their data. They can find these types of reports, they can see the performance of that type of asset and they can say to themselves, “Well I don’t necessarily think I want to buy brand new because I’m not getting good bang for my buck.”  The price and the value is already factored in the profits with the builder or developer. It may not necessarily be with the investor. And then the second-hand market, doesn’t exist! So trying to sell that property to potentially an owner occupier when the vast majority of owner occupiers want a little bit of dirt, bit of terra firma, they want land so they won’t necessarily be buying that stock.

This has serious ramifications for not only renters but also homeowners and if you think about how that flows through the economy it’s really important and that’s what I want to finish on with.

I want to finish on what the threat, what the Masters Builders said. The Masters Builders Association and they like new construction by the way. They’re in the business of helping builders get jobs and get construction happening. Their research showed some staggering problems. They said there’ll be 40,000 less dwellings built under this policy. They also talked about potentially around sort of up to 30,000 less jobs. So less dwellings, less jobs and an $11.2 billion impact to the economy.

This is what we talk about in terms of direct and indirect consequences of policies like this. The marketplace understands itself. Everyone’s on a level playing field and even if you grandfather negative gearing for existing owners and investors, the problem is you can’t guarantee that you will protect their values if you destroy the buyer demand and the buyer behavior that’s going to exist in the marketplace.

So the policy has a big question mark in my view. It’s not good.

It’s not good for investors now, won’t be good for investors in the future.

It’s not good for homeowners who are caught up in this mess because remember they have no say in this but they’re also going to be impacted by property prices falling. They didn’t buy into that.

This was macro policy. And then for renter’s, same thing. Limited rental stock and higher rents are going to be paid. Construction falls away, there arre direct and indirect jobs associated with that.

So we always say to Labor.

Rethink this policy. It’s not a good one. There is an answer somewhere in here but it’s not in the way in which you’ve designed this policy.

Thanks for watching.

This video is part of our Negative Gearing video series.

You’re currently watching Video 3.
Video 1: What is Negative Gearing and Why It’s NOT a Strategy? – Watch here
Video 2: Labor’s Negative Gearing Policy Blunders (Part 1) – Watch here

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