Tax changes could reshape Canberra housing and blow a hole in the ACT budget |
My head is spinning and I am having amazing discussions across my network of economists, investors and property professionals trying to understand how the market will react to the profound changes in the federal budget about the taxation of property investments.
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The federal budget changes will remove negative gearing for future purchases of existing residential properties while continuing to allow it for newly built housing. The current 50 per cent capital gains tax discount will be replaced with a system based on inflation indexation for future gains. Properties acquired before September 1985, which have historically been exempt from capital gains tax, will also become subject to the tax.
Here are my four initial takes on how the market in Canberra (and more broadly) could react and the potential impacts:
1. Institutional investment in residential housing becomes more attractive:
The budget changes reduce the financial incentives for investors to buy homes in participation in a supply-constrained rental market.
This is designed to limit price growth. However, it is also likely to lead to a reduction in the supply of rental properties, in turn leading to potential increases in rents charged to tenants.
The government's hope that an investor will sell to an owner occupier, and therefore there will be no net change, is far too simplistic - what if an owner occupier buys a share house with four people living there? Where do those people then live?
Keeping the tax incentives for new housing will help ameliorate this risk, but that market is supply constrained across the country for a variety of reasons (mostly related to state and local councils making it hard to build), so rents will likely increase. In the 1980s when negative gearing........