Yields to Rise
International comparisons, historical precedents and the effective grossed up yield benefit all indicate that acquisition rental yields are likely to rise between 90 basis points and 1.1% over a two to three year period post the implementation of the new policy. Average acquisition yields therefore may rise from approximately 4.4% up to 5.5%.
Rents to Remain Stable – Initially
Rental changes are initially likely to be negligible with rental growth remaining at current levels of between 1-2%, nationally. However there may be some upwards pressure from year three (2020) due to an expected decline in completions, which in itself may occur due to the forecasted downturn in the market. SQM Research believes market rents could accelerate to 6% in a worse-case scenario.
Dwelling Prices to Fall
Given the forecast of initial negligible rental growth, SQM Research forecasts a correction in the housing market of:
The positive end of the range takes into account a response rate cut of 50 basis points by the RBA. The negative end of the range assumes no rate cuts in response.
Downturn Period to Last between Two to Four Years
The total adjustment in the market housing market is forecasted to last between two to four years with most of the adjustment phase occurring within three years. Thereafter the market would likely potentially return back to equilibrium, having ‘priced-in’ the loss of the tax concession.
Sales Turnover and Stamp Duty Revenue to Slump
Property sales turnover is predicted to fall 17% to 20% with most of the declines in sales to occur in the first year (FY2018). This would result in a fall in aggregate state stamp duty revenue of between $3.1 billion to $3.8 billion.
Off-the-plan Investors at Risk
Investors seeking to benefit from the new concession by buying new properties/off-the-plan developments are exposed to a substantial risk of their property being valued below purchase price, especially if the investor is seeking to sell their investment within the first three years.
Managing Director of SQM Research, Louis Christopher, said “In short, there will be a market impact if Labor’s Negative Gearing Policy is legislated.
Our analysis suggests the market impact would last by around three years with sales falling significantly in year one and a correction to take affect with dwelling prices falling the most in the second year. We think there would be a possible response to this event with the RBA cutting rates, thereby mitigating some of the potential price falls. We don’t think the market will crash per say, but it will be felt by the economy. We then expect the market to return to equilibrium from year three.
We strongly encourage Labor to consider some of the investor issues, particularly surrounding the distortion their policy may create on pricing of off-the-plan developments and the likely losses investors in those properties would face come resale time to those who won’t have the tax concession.
While we take the view that negative gearing reform is a good thing, such reform should be done as part of a wider property tax reform that should include a broad based land tax and the elimination of stamp duties. Such reform should have a phase in period of up to three years. Doing so would reduce the risks of a significant downturn which would likely have wider ramifications on the economy.”
If you would like to download our full report please fill in your details below:
SQM Research Weekly Residential Newsletter 20 November 2018
Christopher's Housing Boom and Bust Report 2019
SQM Research Weekly Residential Newsletter 13 November 2018
SQM Research Weekly Residential Newsletter 6 November 2018
SQM Research Weekly Residential Newsletter 30 October 2018