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Negative gearing concerns add pressure to Australia’s apartment market

The prospect of changes to negative gearing and capital gains tax is posing more of a risk to Australia’s apartment market than the changes themselves, say industry commentators.

February 13, 2019

As sentiment in the residential sector dips ahead of the country’s federal election in May, research shows that new apartment completions for 2019 are likely to drop to 16,000 from 23,200 last calendar year as a result of stricter home loan lending.

Proposals to limit negative gearing on new investments – that is, allowing net losses (including interest costs) to be offset against an investors’ total taxable income - as well as to make tax payable on 75 percent rather than 50 percent of a property’s capital gain, will add more uncertainty to the sector in the short-term, says Leigh Warner, JLL’s head of residential research for Australia.

Both housing policies are expected as part of the opposition Labor Party campaign in the impending election.

"Our greatest concern is not so much the potential policy changes themselves, but the impact on already weak sentiment in the two largest apartment markets of Sydney and Melbourne,” says Warner.

“It is likely to be a very negative election campaign in which these property taxation issues are front and centre and there is a risk that this could further significantly damage confidence, regardless of whether the debate is based on fact or not.”

The projected decline in apartment completions this year indicates that supply from the current construction boom has peaked.

While it will fall sharply over 2019, strong underlying demand growth “will help re-establish equilibrium relatively quickly”, says Warner, particularly as apartments remain more affordable than houses and population continues to grow robustly.

“There is even a risk that supply will fall too sharply for the country’s booming population growth and that in a few years’ time we will be talking about us not building enough again,” adds Warner.

The difficulty progressing projects is also reflected in Australian Bureau of Statistics figures, which show residential building approvals have fallen 22.5 percent over 2018.

The findings of the ongoing Hayne royal commission into misconduct in the banking and financial centre are also set to affect market sentiment.

Australia Property Council chief executive Ken Morrison urged policymakers not to “break the economy” by hastily implementing recommendations, particularly to the mortgage broker sector.

“The risk is that people can’t get access to credit, can’t borrow to purchase housing, projects can’t access credit to get off the ground and we see a slowing down of housing construction which is very critical to the overall economy,” he says.

Across Australia's five mainland capitals there were 40,800 apartments under construction at the end of 2018, down from 44,300 in the third quarter of the year.

Sydney’s apartment market is yet to bottom out. While demand and prices are falling, gross rental yields remained broadly stable, at about 3.9 percent.

Melbourne's apartment market is moving more slowly into a downturn, however, the city’s strong population growth and declining supply should soften the impact.

In Brisbane, construction levels peaked earlier, in 2016, and the market is further through the downturn. Development conditions will remain subdued for the next few years, though apartment rents and capital values are starting to stabilise.

The Perth market is around the bottom of the cycle and expected to improve in 2019, but high levels of supply could keep the market subdued.

Adelaide will likely slow as supply rises and demand weakens due to measures such as the end of the state government's off-the-plan apartment concessions.

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