Labor's negative gearing changes will force property prices down and rent up, study says A new report says Labor's planned rollback of tax breaks for property investors will lead to lower property prices and higher rents. Key points: Study estimates national property prices to fall nationally between 5 and 12 per cent by 2022Rental prices also expected to rise as investors recover lossesStudy found house prices to rise between 8 and 14 per cent if no changes made The report from SQM Research says property prices will fall nationally by between 5 per cent and 12 per cent by 2022 if Labor scraps negative gearing for existing properties and halves the Capital Gains Tax discount from 50 per cent to 25 per cent.However, if the Reserve Bank cuts the interest rate by half a per cent, SQM believe the falls would be between 4 and 8 per cent.Under an alternative scenario with no changes to tax breaks for investors, but where the Reserve Bank cuts interest rates by half a per cent, they predict property prices would rise between 8 per cent and 14 per cent over the same period. "Property prices will fall because investors are going to demand some sort of discount for the lack of tax concession they once had," said SQM's founder Louis Christopher. "We think investors will be seeking a higher rental yield to make up for the lack of tax concession."The rental yield on a property is a calculation which measures how much cash an investment is generating, as a percentage of that asset's value. Put simply, when it comes to an investment property, it's the rent received on that property divided by the cost of the property. Or the Gross rental yield = (Annual rental income / Property value) x 100. For example, if a property worth $500,000 received a rental income of $500 a week its gross rental yield would be (52 x $500 / $500,000) x 100, or 5.2 per cent.SQM's research argues that investors will demand a higher rental yield because they will no longer get a tax concession. And for that to happen, either the price of the investment property needs to go down, or the rent needs to go up. Their assumption, at least initially, is that it'll be house prices that take the hit. Shadow Treasurer Chris Bowen rejects the research."I agree with the Treasury analysis. The Treasury has said the impact of Labor's policy would be modest," Mr Bowen said. Treasury's advice to the government is that Labor's planned changes "could" put downward pressure on house prices in the short term depending on what else is going on in the market at the time. It says in the long-term the changes would be unlikely to have much impact. Photo: Jordan Bill negatively gears his property in southern Queensland and says it helps him. (ABC News: Michael Atkin) Investors worried what the changes mean for their house pricesJordan Bill is one of the more than 1.25 million Australians who negatively gear an investment property. He says the tax concession isn't the main reason he bought the property but says it "absolutely" helps financially. He and his wife Belinda bought the property in Cabarlah near Toowoomba in southern Queensland for $265,000 back in 2016 as an investment to help secure the family's financial future."We wanted a self-funded retirement," he said. "We didn't want to be on the pension or relying on the government.""We worked, really, really hard. We saved our pennies and did everything we could to get that property.".Mr Bill's personal negative gearing arrangements won't be affected by Labor's changes because the changes will be grandfathered. But he is worried that his property won't be as attractive to a potential future buyer because they won't be able to access similar tax breaks."I think it's just an added pinch point that we don't need at the moment," he said. "We're going to get lower and lower prices."Australian property prices in retreatAMP chief economist Shane Oliver says he agrees with the underlying "sensible" logic of SQM's research and thinks there will be downward pressure on property prices because of Labor's changes.He worries that with property prices already falling, now might not be the time to be making changes to tax breaks for property investors."The risk is that it just adds to the perfect storm that's around property prices at the moment. That it adds to the uncertainty and pushes prices down even further."When Opposition Leader Bill Shorten announced Labor's policy to scrap negative gearing for existing property purchases and halve the capital gains discount in February 2016, Australian property was running hot. The year before, in 2015, property prices had risen an average 8.7 per cent and showed no sign of slowing down. At the time Mr Shorten promised to "put the great Australian dream back within reach of working and middle class Australians, who have been priced out of the market for too long."Fast forward to 2019, and it's a completely different story. Nationally prices fell by 5.1 per cent last year, with the consensus view that prices will continue to fall this year. Photo: Rhianna Woolnough and partner Michael Moragn are hunting for their first home but are worried about rising house prices (ABC News: Mitchell Woolnough) First home buyers still struggling to buy inRhianna Woolnough and partner Michael Morgan are on the hunt for their first home.Unfortunately for them, they are looking in Hobart. The Tasmanian capital is bucking the national trend with house prices still rising quickly, up a further 9.6 per cent last year. Rhianna says she is concerned about how they will ever be able to buy in."I'm definitely more the worrier. I worry what our situation will be like in six months, in 12 months," she said.Michael says for them, buying a house is more than an investment."It means that we can have the flexibility of having kids and not having to think about it," he said."It's just much more of an issue being in a rental property and not having those freedoms." They have missed out on many houses, outbid by investors, and welcome Labor's proposed changes in the hope they will give them a better shot at securing a property. Australian property still 'severely unaffordable'Despite recent falls, Australian property by almost any international or historical comparison is still very expensive. Back in the 1980s and early 1990s, Australians could buy an average home for two to three times their average annual household income after tax. Today, it's between five and six times. Infographic: Despite the recent decline in property prices, Australian property remains expensive. (Supplied.) All Australia's five major markets are considered "severely unaffordable" but the problem is most acute in Sydney and Melbourne. Infographic: Australia's five major markets are still considered to be severely unaffordable. (Supplied.) Louis Christopher says Labor's changes will mean cheaper property prices for first home buyers."It's fair to say prices are going to fall and that will help in some respect with affordability."But he warns those who are still renting might feel the pinch."When we get into year 2 and year 3 we are likely to see a reduction of rental affordability." Chris Bowen says Labor's changes are about helping first home buyers compete with investors. "I want to make sure the tax system, that's the federal government's responsibility, is working to put first home buyers on a more even playing field." "The tax system should not support someone buying their fifth, sixth or seventh house more than someone buying their first."Labor has not yet laid out its timetable for when the changes will be implemented but Mr Bowen promises voters will know "well before" the election.Shane Oliver urges caution and says the prospective next treasurer should be mindful of the potential impact on the broader economy. "If we're in an environment where the property market is under a lot of downward pressure, the last thing you want to do is add to that downward pressure. "We all want more affordable housing, even I think it's unfair that young people have to pay so much for housing, but we don't want that increase in affordability to happen so quickly that it damages the economy," Mr Oliver said.
