STEPHEN JOHNSON: Why Labor’s tax changes will cause rents to soar without helping first homebuyers

Labor’s changes to capital gains tax and negative gearing could cause rents to surge as investors pulled out of the housing market without helping first homebuyers.

National Australia Bank has revised its forecasts to have capital city prices this year falling by 2 per cent, driven by 6-7 per cent drops in Sydney and Melbourne.

It noted rental vacancy rates were near record lows of 1.7 per cent with advertised rental growth of 5.9 per cent year-on-year, with immigration levels expected to be higher than predicted little more than six months ago.

Contentious tax changes that are yet to pass the Senate are universally expected to discourage the very investors who rent out homes to the likes of international students and newly arrived migrants.

Treasury secretary Jenny Wilkinson claimed the Budget changes would see more property newcomers enter in the housing market as they faced less competition from prospective investor landlords, under friendly questioning from 22-year-old Labor senator Charlotte Walker.

“If those changes weren’t made, then there wouldn’t be a switch of investors out of home ownership, which makes more houses available for first homebuyers,” Ms Wilkinson told the Senate economics committee on Thursday.

“Probably one of the more significant impacts of the tax changes is really to actually shift the ownership structure of housing away from investors to some degree towards owner-occupiers.”

But Cameron Kusher, the chief economist with property valuer Herron Todd White, said it was misleading to claim first homebuyers would simply just enter the market as fewer investors took an interest in existing properties, which won’t be able to be negatively geared from July 2027 if they weren’t purchased before Budget night.

“I think that we will see more first homebuyers but it’s not going to be a one-for-one substitute between an investor sells, there’s necessarily going to be a first homebuyer replacing that,” he told The Nightly.

“You’ll actually find that some of the investors try and exit the market, find it difficult or maybe impossible to sell that property because there’s just not enough demand to purchase those homes.”

First home buyers made up just 21.6 per cent of new home loan commitments in the March quarter, compared with 41 per cent for investors, Australian Bureau of Statistics figures showed.

Mr Kusher is expecting house values to fall at the lower end of the market, as investor interest waned.

But with Australia continuing to rely on immigration-fuelled population growth, landlords holding on to properties would simply put up rents.

“I do think the rental market, which is already very tight, is going to tighten quite a lot more, and I think, where possible landlords are going to be looking to focus more on rental income than capital growth,” he said.

“Trying to push those rents higher is probably what I think they’ll do.”

Treasury is now expecting 295,000 migrants on a net basis to have moved to Australia in the year to June 30, which is 35,000 more than a forecast of 260,000 arrivals as recently as December in the Mid-Year Economic and Fiscal Outlook.

“We are seeing some slowing in the rate of departures and that is influencing the upgrade that we are making to the forecasts,” Treasury’s deputy secretary of the macroeconomic group Dr Angelia Grant said.

Hamish McDonald, a Treasury policy analyst, backed up that assessment.

“We’ve been seeing for a little while that recent cohorts have been departing at a slower rate than what they have in the past,” he said.

Labor’s plan to replace the 50 per cent capital gains tax discount with a minimum 30 per cent tax on inflation-adjusted gains would apply to all asset classes and not just property, which could potentially see investors longer-term return to property if the share market looks risky.

“Longer term, I think this change will probably be a shock for several years and then investment will eventually come back,” Mr Kusher said.

With the family home exempt from the capital gains tax, those who may have previously been inclined to buy investment properties would simply renovate the home they live in or buy something bigger to live in, which ultimately leads to higher prices.

If unemployment stayed at relatively low levels, Reserve Bank of Australia governor Michele Bullock isn’t expecting a surge in negative equity — where borrowers owed their bank more than their home was worth.

“At the moment, practically no one is in negative equity,” she told senators on Thursday.

“Negative equity matters if people get into trouble with their loans and then they have to sell their homes to meet that. That’s why a strong employment market is really important.”

Property prices may fall in the short term but would still keep on rising in coming years, meaning Australia will still having a housing affordability crisis for both renters and those wanting to enter the market without a substantial slowdown in population growth.