Why Labor’s negative gearing changes to new homes will force up prices in greenfield outer suburbs

Labor’s changes to negative gearing will only force up prices in new, affordable outer suburbs, a millennial who owns 18 residential investment properties says.

Tax breaks for landlords who make a rental loss are being grandfathered if a contract was signed before Budget night on Tuesday last week.

But investors who buy an existing home from Budget night until June 30 next year won’t be able to claim negative gearing on their annual tax return from July 2027 as the tax break is restricted to new properties.

Property investment strategist Daniel Walsh, 35, who bought his first house for $342,000 in 2011 in Sydney’s outer south-west, predicted this would see first-homebuyers end up competing with investors and migrants in cheaper, greenfield suburbs during a time when builders are in short supply.

“You’re driving investors into the same areas that you want the first-homebuyers to buy the property,” the founder of the Your Property Your Wealth buyers’ agent told The Nightly.

“We’ve got immigration competing over time. We’ve got first-homebuyers now actually competing against investors as well.

“All three of them are honing in on these brand-new builds. They’re going to jack the prices up of build costs because there’s not enough builders to build these properties anyway.”

Without being able to negatively gear an existing property, landlords in wealthy suburbs near big city centres will only push up rents, making it very hard for the young to “rent-vest” where they rent in a postcode near their career job and rent out an investment property in a cheaper area.

“The younger generation are going to get hurt more than ever,” Mr Walsh said as the owner of investment properties in Sydney, Adelaide, Perth, Brisbane and Melbourne.

“The rent-vesting strategy is going to be really hard because the rents go up on them and they can’t get negative gearing on the properties that they’ve got - all of a sudden they’re getting hit double whammy.”

Under little known changes, those who bought an existing home to live in since Budget night can rent it out for six years and not pay capital gains tax during that period.

But instead of being able to negatively gear rental losses to reduce their income on their annual tax return, they can instead claim those rental losses when they sell.

“If they buy an established property, they’re not losing negative gearing, they’re forgoing the time frame they can access negative gearing - basically, I’ll say to my clients, ‘Hey, client, you aren’t claiming back the $5000 or $9000 in negative gearing against your income extra each year, instead you’re carrying that loss forward. When we sell the property, we add up all those losses throughout the negative gearing that you did not claim; we’ll then take that off the capital gains tax in the end’,” Mr Walsh said.

Treasurer Jim Chalmers on Monday defended the Budget changes to negative gearing and the replacement of the 50 per cent capital gains tax discount, from July next year, with a minimum 30 per cent tax and indexation.

“It would have been the easiest decision in the world to leave everything as it was,” he said.

“To leave in place this busted, status quo which operates in tandem in the housing market and the tax system to make life harder for more Australians, particularly younger Australians and we could have left that in place.

“That would have been politically easier to do so, I acknowledge that.”

Dr Chalmers was responding to a Newspoll showing last week’s Budget had the worst reception since the Treasurer’s political hero Paul Keating’s Labor government failed to deliver “L-A-W law” income tax cuts after the 1993 election.

“The Budget was full of hard decisions and not handouts and we don’t hand down Budgets expecting to make some kind of big, near-term positive difference to an opinion poll five days later,” Dr Chalmers said.

“It would surprise me more if we got some sort of bounce in the polls from the difficult decisions that we took in the Budget.”

Monday marks the seventh anniversary of Labor losing the 2019 election under Bill Shorten with plans to restrict negative gearing to brand new homes and halve the 50 per cent capital gains tax discount to 25 per cent.

The Opposition is accusing Labor of breaking an election promise, considering Prime Minister Anthony Albanese had dumped those policies ahead of the 2022 election.

“It became increasingly clear to us that the longer we left these arrangements in place, the more people would be locked out of the housing market and that’s why we’ve changed our position, why we’ve come to a different view,” Dr Chalmers said.

“We would rather do the right thing, even if it is difficult. Even if we take a near-term, political hit for it.”

Housing Minister Clare O’Neil said many Australians see the housing system stacked against them after the Federal Government reached a deal with Queensland to build more than 20,000 properties specifically for first-home buyers.

“Australians see a housing system stacked against them and we want to help them out,” she told reporters in Brisbane.

“We want them to get ahead, we want them to do it in a home of their own, and our government is throwing everything at this challenge.

“Some big historic reforms that will level the playing field for first-home buyers and build more homes for our country.”

Sydney, Australia’s most expensive capital city market, saw its weekend auction clearance rate fall six percentage points to 49.2 per cent, marking the weakest result since COVID in April 2020, Cotality data showed.

But in Brisbane, 55.7 per cent of homes sold above the reserve price, the highest in four weeks.