In February, RiskWise Property Research CEO Doron Peleg was invited to participate in a roundtable discussion in Canberra alongside key government officials and industry leaders. The gathering included the Prime Minister, the Treasurer, the Assistant Treasurer, and several representatives from prominent organizations such as Yellow Brick Road, VGI Partners Global Investments, the Master Builders Association, the Urban Development Institute of Australia, the Real Estate Institute of Australia, Property Investment Professionals of Australia, and the Property Council. The topic of the roundtable centered around the Australian government’s housing policy, particularly the proposed taxation changes announced by the Australian Labor Party (ALP) aimed at addressing the country’s housing affordability crisis.
Peleg’s participation in this high-level discussion provided an opportunity for RiskWise Property Research to share its insights on the housing market, informed by extensive analysis of current market trends. It also allowed Peleg to engage directly with policymakers and other stakeholders, including developers, economists, and property investors, to understand their concerns regarding the ALP’s taxation proposals.
As Peleg explains, the purpose of the roundtable was not only to present RiskWise Property’s research on the housing market but also to listen to the concerns of others in the room. The debate surrounding Labor’s proposed taxation changes has sparked significant discussion, as industry leaders fear the unintended consequences these reforms may have on the property market. Some concerns voiced during the roundtable centered around the potential negative impact of the reforms on housing prices, new dwelling commencements, and the broader economy, particularly GDP growth.
An Overview of Labor’s Proposed Taxation Changes
To better understand the stakes of the roundtable discussion, it is important to first explore the ALP’s proposed taxation changes. The Labor Party’s approach aims to reduce the pressure on housing prices by limiting the scope of negative gearing to newly constructed dwellings and reducing the capital gains tax (CGT) discount from the current 50% to 25%. The primary objective of these reforms is to shift investor demand away from established properties and towards new housing, which, in theory, would increase the supply of new dwellings and alleviate some of the housing affordability issues that have plagued Australia in recent years.
Labor’s vision is rooted in the belief that by incentivizing investment in new dwellings, the supply of housing will increase, leading to lower prices for both new and established properties. The party contends that this shift will make it easier for first-time buyers to enter the housing market by reducing competition from investors who have historically driven up prices in certain segments of the market.
However, as was evident in the roundtable discussions, this approach is far from straightforward. Peleg, along with other experts in the room, highlighted several concerns about the proposed reforms and their potential consequences. The real estate sector, including developers and investors, has voiced substantial reservations about how these changes will affect the overall housing market, particularly in major cities like Sydney and Melbourne, where demand for housing has historically outstripped supply.
The Short-Term and Long-Term Impact on Housing Prices
A major concern raised at the roundtable was the potential impact of the ALP’s taxation changes on housing prices, particularly in the short term. While the proposal aims to reduce investor activity in the established housing market, experts believe that this shift in demand will not automatically lead to lower housing prices in the way that Labor anticipates. According to Peleg’s analysis, the taxation changes will likely have only a temporary impact on the housing market, and in some cases, may exacerbate existing affordability challenges.
The reduction in investor demand, particularly for established properties, could put downward pressure on housing prices in the short term. However, it is unlikely that this effect will be sustained. As many investors know, the property market is cyclical, and the reduction in prices resulting from the proposed tax changes may only be a temporary adjustment before demand picks up again. Additionally, the lack of investor interest in established properties could lead to a slower pace of property transactions, further contributing to market stagnation.
From a long-term perspective, it is unclear whether the shift in demand toward new dwellings will lead to a significant reduction in overall housing prices. While more new housing could theoretically increase supply and help alleviate affordability issues, the overall effect on prices will depend on a range of factors, including population growth, economic conditions, and the availability of land for development.
Moreover, the emergence of a “primary” and “secondary” market, as Peleg describes it, could distort pricing dynamics in the property market. Investors who enter the market under the new taxation rules may find that the properties they purchase will have limited resale value in the secondary market due to the reduced CGT benefits. This dynamic could lead to reduced prices for existing properties, but it may also create a two-tier market where investors in new dwellings face more difficult conditions when attempting to sell their properties in the future.
Concerns from the Development Sector: A Risk to New Housing Supply
The development sector’s concerns about the proposed taxation changes were one of the key focal points of the roundtable discussion. Developers have long been seen as a critical part of the solution to Australia’s housing affordability crisis. Labor’s proposal to encourage investment in new dwellings was viewed by many as an effort to increase housing supply, particularly in high-demand areas like Sydney and Melbourne. However, the reality is far more complex.
Developers voiced concerns that the proposed reforms could undermine their ability to meet pre-sale and sales targets for new developments. As Peleg explained, many developers are already struggling with weak investor sentiment, and the proposed taxation changes are expected to make matters worse. According to new economic modelling commissioned by the Master Builders Association, the ALP’s proposed reforms will not lead to an increase in new housing supply, as the government hopes. Instead, these changes are likely to result in a further reduction in dwelling commencements, with many developers scaling back their projects in response to weaker investor demand.
This risk to the supply of new housing is particularly concerning given that dwelling commencements have already declined by 2.2%, with units being disproportionately affected. Furthermore, dwelling approvals have fallen sharply by 22.5%, signaling a significant slowdown in new housing development. This downward trend is likely to continue unless a comprehensive strategy is developed to incentivize housing construction and ensure that developers can meet the demand for new dwellings.
The Broader Economic Impact: A Drag on GDP Growth
Beyond the direct effects on the housing market, the ALP’s proposed taxation changes could also have a significant impact on the broader economy. The property market is a key driver of GDP growth in Australia, and any slowdown in housing construction and sales could have far-reaching consequences for economic performance. According to the Reserve Bank of Australia (RBA), the Australian economy is already facing challenges, with GDP growth projections being downgraded. A further contraction in the property market could exacerbate these challenges, leading to weaker economic growth and potentially higher unemployment.
The construction industry, in particular, is highly sensitive to changes in the property market. A reduction in new housing construction could result in job losses not only in the construction sector but also in a wide range of associated industries, including real estate services, trades, and supply chains. The loss of jobs in these industries could contribute to a broader slowdown in economic activity and put further pressure on Australia’s already fragile economic outlook.
Investors’ Confidence Crisis: The Risk of a Shrinking Market
For property investors, the proposed taxation changes present a significant challenge to confidence in the market. Property investment is often a long-term commitment, and investors typically seek assurance that the market will continue to offer growth potential. The proposed changes to negative gearing and CGT are seen as a direct threat to the stability of the investment landscape, particularly for those who rely on these tax benefits to make their investments financially viable.
Peleg’s research indicates that the proposed tax changes are likely to result in a reduction in investor confidence, particularly among those looking to purchase off-the-plan properties or invest in new developments. This loss of confidence could result in fewer presales and sales of off-the-plan properties, which are critical to the success of many new housing projects. Without sufficient pre-sale activity, developers may be unable to secure financing for new projects, leading to further declines in dwelling commencements and a worsening housing supply shortage.
Addressing Housing Affordability: A More Comprehensive Approach
While the ALP’s taxation reforms are driven by the desire to tackle housing affordability, experts agree that they do not offer a sustainable long-term solution. As Peleg and other stakeholders at the roundtable pointed out, the best way to address housing affordability is not through short-term tax changes but by focusing on increasing the supply of affordable housing through strategic planning and investment.
A more comprehensive approach is needed to tackle the underlying causes of housing unaffordability. This should involve coordinated efforts between federal, state, and local governments to increase land supply, streamline development processes, and promote infrastructure investment in areas that are well-connected to employment hubs. Additionally, significant investments in public transportation, education, and healthcare outside of major cities like Sydney and Melbourne would help reduce population pressure on these cities and create more opportunities for affordable housing in other parts of the country.
Moreover, promoting the development of new industries, such as technology and innovation, in regions outside of Sydney and Melbourne could help to diversify the economy and reduce reliance on these two states as economic centers. This would ease demand for housing in these cities and help to stabilize housing prices across the country.
Conclusion: Time for Transparency and Long-Term Solutions
The ALP’s proposed taxation changes are a step in the right direction in terms of addressing housing affordability, but they are unlikely to have the desired effect on the property market in the long term. As discussed in the roundtable and highlighted in our research at RiskWise Property, the proposed reforms could have significant negative consequences for the housing market, economic growth, and investor confidence.
It is time for Labor to engage in a more open and transparent discussion about the potential consequences of these proposed changes.
The government should reconsider the impact these reforms will have on housing supply and investor sentiment. A more comprehensive approach to housing affordability, focused on increasing housing supply, improving infrastructure, and diversifying economic opportunities, is needed to ensure that all Australians can access affordable, quality housing.
At RiskWise Property, we remain committed to providing up-to-date research and insights into the property and investment markets. As the housing market continues to evolve, it is essential for investors, developers, and policymakers to work together to create a more sustainable and affordable housing market that benefits all Australians. Only through careful planning, collaboration, and long-term vision can we hope to address the housing affordability crisis and build a more resilient property market for the future.
