Labor policy could wreak havoc on mortgage market

Australia’s mortgage market could be in for a rough ride if Labor’s negative gearing proposals become a reality, a new report has warned.

The report by SQM Research, released yesterday, examines the impact Labor’s negative gearing policy could have on the market.

It noted that housing finance approvals fell sharply when negative gearing was briefly abolished in 1985.

SQM Research used the total number of housing finance approvals excluding refinancing of established dwellings, recorded by the ABS. SQM said it chose this measure because it has been a reliable indicator of demand and has had strong correlations with national sales turnover.

“In the months leading up to the abolition of negative gearing in July 1985, housing finance approvals growth was relatively steady, averaging 1 per cent growth per month over a two-year period leading up to July 1985,” the report said.

“Following the scrapping of negative gearing, housing finance approvals recorded sharp falls with an average monthly 5 per cent decline for the three months following and an average monthly decline of 4.3 per cent for the six months following.

“When comparing refinancing on an annual basis, the first 12 months following the abolition of negative gearing in 1985 saw a decline in housing finance approvals of 18 per cent.”

However, housing finance approvals picked up following the introduction of negative gearing in September 1987. The study found housing finance grew some 43 per cent the first year negative gearing was re-introduced.

According to the report’s estimates, dwelling sales would decrease by 17 per cent to 21 per cent in the first full year following the scrapping of negative gearing.

“Thereafter, sales turnover would stabilise and eventually return to normal market activity levels once the market completes the adjustment phase,” it said.

The report also identified a “very high risk” investors purchasing new property could experience losses on a resale in the first three years of a property’s life, if Labor were to implement its policy.

“The issue is that any secondary buyer will demand some type of discount, given the buyer would not be entitled to receive negative gearing tax concessions on the property. And subsequently, such a buyer may demand a discount to offset the lack of concession,” it said.

The report said developers could put a premium on such properties given they will be in higher demand than existing properties.

[Related: My take on negative gearing reform]

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