How Labor’s plan to scrap negative gearing could cause house prices to plunge by another 15%

Labor’s plan to scrap negative gearing could cause house prices to plunge by another 15 per cent in Australia’s biggest cities and cause a spike in rents, economic modelling predicts.

SQM Research, an independent property analysis firm, has released explosive new predictions less than two months before an election is to be fought over tax breaks for investor landlords.

Were Labor to win the May federal election as expected, house and apartment prices in Sydney could plunge by up to 14 per cent in Sydney and by 16 per cent in Melbourne, between 2020 and 2022.

Labor’s plan to scrap negative gearing could cause house prices to plunge by 15 per cent in Australia’s biggest cities and cause a spike in rents, economic modelling predicts

With Sydney’s median house price already down 15 per cent, since peaking in July 2017, that would represent a 29 per cent drop or a massive $300,000 decline in just five years, when SQM Research predictions were combined with CoreLogic data.

That dire scenario is based on the Reserve Bank of Australia keeping interest rates on hold at a record low of 1.5 per cent as Labor embarked on a plan to make housing more affordable.

SQM Research predicted the Opposition’s plan to scrap negative gearing for future purchases of existing real estate would have devastating consequences for the economy as the construction sector slowed down.

The group’s founder and economist Louis Christopher called on Labor to delay its ‘ill-timed’ plan to wind back negative gearing or phase it in over three years instead changing tax laws in 2020.

Were Labor to win the May election, house and apartment prices in Sydney (pictured) could plunge by up to 14 per cent in Sydney and by 16 per cent in Melbourne, between 2020 and 2022, SQM Research predicted

Were Labor to win the May election, house and apartment prices in Sydney (pictured) could plunge by up to 14 per cent in Sydney and by 16 per cent in Melbourne, between 2020 and 2022, SQM Research predicted

‘They need to think this through a bit more,’ he told Daily Mail Australia.

‘Sadly, I think Labor are doing it the wrong way.

Rent rises if Labor wins the election

Sydney: 3 per cent to 10 per cent

Melbourne: 9 per cent to 15 per cent

Brisbane: 13 per cent to 22 per cent

Adelaide: 9 per cent to 15 per cent

Perth: 12 per cent to 20 per cent

Hobart: flat to 10 per cent

Darwin: -1 per cent to four per cent

Canberra: four per cent to 10 per cent

Source: SQM Research modelling for 2020 to 2022 based on Labor scrapping negative gearing for future purchases of existing properties and the Reserve Bank of Australia leaving interest rates untouched 

‘Repealing negative gearing during a downturn is going to aggravate the situation so construction will fall further than what otherwise would have happened.

‘That is a big negative for the economy at a time when it’s pretty patchy.’ 

Should the Coalition win an unlikely election victory in May, SQM predicted  Sydney and Melbourne property prices would climb by up to 14 per cent between 2020 and 2022.

That prediction is based on the Reserve Bank cutting interest rates twice as negative gearing is left alone by a conservative government.

‘There is definitely a key policy differential between Labor and Liberal on housing,’ Mr Christopher said.

‘Voters definitely have a choice which policy direction they want the country to go down.’ 

The research also predicted a spike in rents, if Labor wound back negative gearing and halved the capital gains tax discount from 50 per cent to 25 per cent.

‘Yields will have to lift because investors will demand some type of compensation for the lack of tax concession,’ Mr Christopher said.

Should the Coalition win an unlikely election victory in May, SQM predicted Sydney (pictured) and Melbourne property prices would climb by up to 14 per cent between 2020 and 2022

Should the Coalition win an unlikely election victory in May, SQM predicted Sydney (pictured) and Melbourne property prices would climb by up to 14 per cent between 2020 and 2022

It forecast rents rising by up to 20 per cent in Perth and by 22 per cent in Brisbane, between 2020 and 2022.

Sydney rents meanwhile would rise by 10 per cent as Melbourne and Adelaide tenants paid an extra 15 per cent, on the proviso interest rates were unchanged. 

To make their point about rents, SQM Research analysed rent increases across Australia, between 1985 and 1987, when another federal Labor government led by Bob Hawke scrapped negative gearing.

Australian house rules

Sydney, down 11.5% to $888,117

Melbourne, down 11.5% to $729,392

Brisbane, down 0.4% to $538,849

Adelaide, up 0.9% to $467,684

Perth, down 6.7% to $461,890

Hobart, up 6.8% to $489,811

Darwin, up 0.2% to $479,103

Canberra, up 4.1% to $665,701

Source: CoreLogic Home Values Index on median house prices in the year to February 28 

An analysis of Australian Bureau of Statistics inflation data showed rents surged by 33 per cent in Perth and by 31.4 per cent in Sydney, which were well above the average capital city increase of 20.6 per cent. 

The Hawke government reintroduced negative gearing in 1987, following an outcry from the property industry.

In early 2016, however, Labor leader Bill Shorten vowed to wind back the policy, during an era when Sydney and Melbourne house prices were surging by double-digit figures. 

Labor has vowed to scrap negative gearing for existing properties, at a yet to be specified date and repeal tax refunds for shareholders who don’t pay any income tax.

Its plan to scrap both set of tax concessions is designed to save taxpayers $80billion over the next decade and prevent investors from crowding out first-home buyers from the property market.

An average full-time work on an $83,500 is already on mortgage stress paying off a $500,000 home loan with a 20 per cent deposit. 

A median-priced house in Sydney and Melbourne would be out of their reach unless they were in a double-income relationship.

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