Economists divided over controversial housing tax changes as reform could lure property investors to regions

Housing tax changes make investing in a house in the regions more attractive than in the big cities, economists say.

As transient mining and farm workers typically pay rents that are relatively higher compared with the price of the house than in the cities, experts say changes to negative gearing make regional purchases a better option.

REA Group economist Luc Redman said changes to capital gains taxes and negative gearing “provide a slightly more favourable opportunity for regional property relative to metro”.

“That comes down to two key components of how regional property evolved prior to the pandemic: trends that are beginning to swing back towards normal levels.”

Regional areas with established mining and farm workforces had always commanded higher rental yields for the owners who borrowed to buy the property, Mr Redman said.

“Those higher yields are certainly more difficult to come by in metro areas and, with the negative gearing changes, will likely attract more investors, as their ability to deduct loan losses is lost,” he said.

Because typically houses in the regions do not appreciate in value as quickly, slashing the capital gains tax discount also hurts metro owners by comparison.

An investor wanting to negatively gear in the future – which to start must be a new home – takes on more risk doing so on a property out in the regions though.

“The risk to investors pursuing this tactic in regional areas is that returns are contingent on future demand to live in that region, which would mean the area has a strong industry underpinning or lifestyle attractiveness,” Mr Redman said.

Fresh Economic Thinking chief economist Cameron Murray said the tax changes did not favour regional housing over metro investments.

Regional housing returned higher rent yields because owning a house in the country was riskier, and the tax changes would affect city and regional housing investments proportionately, he said.

“The net effect is a wash,” Mr Murray said.

“If there is an effect on market decisions to buy new housing over existing, then that will have to occur in locations where new housing is more common. But that historically has been cities, which have grown faster than regions in recent decades.”

A key pandemic-era trend was also starting to flip, he said.

“Given the Covid-era flight from cities is reversing a touch now, I don’t think there is much market demand for more new homes in the regions – except in special circumstances where there are local resource booms.”

Australian Bureau of Statistics figures show regional Australia gained 43,000 people in 2020. About 86,000 people left Sydney between June 2020 and June 2022, and 60,000 Melburnians left the big smoke during the same period.

Peter Tulip from The Centre for Independent Studies said the capital gains tax change marginally favoured regional investors.

“I don’t think the tax changes will make a significant difference to regional real estate,” Dr Tulip said.

“Properties with relatively high rental yields, as we see in the country, are less adversely affected than properties relying on capital gains, as in the city, but the difference is small.”

Investment properties purchased after 7.30pm on the night of the federal budget, May 12, cannot be negatively geared from July 1, 2027 – except if the home is newly built.

But council zoning laws remain a stubborn hurdle for housing developments in regional centres.

Grattan Institute associate Ashleigh Chang said these supply constraints were still the biggest handbrake.

“Regional markets may not be about to become ‘hotspots’, but much like in our cities, there are many regional areas where rents are high relative to prices because there simply aren’t enough homes,” she said.

“In many regional areas the binding constraint to supply doesn’t seem to be investor appetite – it’s that we’ve made it too hard to build.

“If planning systems keep choking off new supply, that ‘buy new and hold for yield’ route is actually harder in the regions, not easier.”

Regional councils needed to zone for higher density homes in the town centres, make more land available on the edge of town and make sure “a small number of objectors aren’t able to stop already-approved housing for months at a time”, Ms Chang said.