The Federal Government's taxation reform does little for first home buyers, discourages investment at a time when rental markets are constrained, and impacts low-income earners striving to get ahead, according to REIWA President Suzanne Brown.
"Affordability is a key issue for first home buyers, and these measures are not going to reduce prices," Ms Brown said.
"The Government expects investor demand to decline, which it says will lead to a small and temporary slowing of price growth, but it still expects prices to rise over the next couple of years, just at a lower rate.
"And I'll note this a very broad expectation, covering the whole of Australia. The WA property market is one of the strongest performing markets in the country. Demand for property is high, and while the reforms may discourage investment in established homes, there is enough competition from owner occupiers to maintain the competition for property and strong price growth.
"I am also concerned about the impact these reforms will have on low-income earners. For example, people that have worked hard to fund their retirement and will now pay a minimum tax rate of 30 per cent on any capital gain they receive from assets they sell, whether that's property or shares.
"This will also impact enterprising first home buyers on low incomes, who are trying to use shares or ETFs to build a deposit for their first property."
Ms Brown expects the reforms will deter investors, which will have a negative impact on WA's already constrained rental market.
"While supply in WA has increased over the past two years, it remains below the peak set in February 2021. Our population has grown by about 360,000 people since then, and we need to exceed that peak if we want to see the market improve. To do that we need to retain the investors we have and encourage more investment," she said.
"Unfortunately, the Government explicitly designed these reforms to reduce investor demand.
"We have already lost properties from the market in the past few months, with our members reporting an increase in the number of sales by investors in the lead up to the Budget. There has also been an increase in appraisals for investors, with many waiting for clarity on the proposed changes before making a decision on the future of their investment.
"Existing investors are going to be impacted by the changes to the capital gains tax discount. There may be some who choose to sell now to qualify for the 50 per cent discount before the changes come into effect on 1 July 2027.
"On the other hand, grandfathering negative gearing for existing investments may prevent a significant exodus of negatively geared investors.
"Limiting negative gearing to new builds may help support the creation of new supply, but this is unlikely to be in the inner-city areas of Perth, where we have lost the most rental supply and demand is highest. Over the past few years, the greatest increase in supply in Perth has been in outer suburbs where investors have purchased house and land packages. However, these are not always the areas where tenants want to live.
"Removing negative gearing for established homes may also have the unintended consequence of increasing competition between first home buyers and investors.
"Investors that do not want to build a new home on the outskirts of Perth will look to lower-priced suburbs, or at cheaper property types such as apartments and units, where their investments can be neutrally or positively geared.
"These are usually the suburbs and types of properties that appeal to first home buyers seeking to enter the market."
Ms Brown said, ultimately, the unintended consequence of these reforms would be higher rent prices and greater affordability pressures for tenants.
"The Government's modelling predicts a very modest $2 per week increase in rents. I don't believe this will be close to reality if we lose investors from the market and deter future investment," she said.
"What the Federal Government has failed to take into account is the strength of demand, and the already challenged nature of rental markets in WA and other jurisdictions.
"WA already has an imbalance between supply and demand. This is demonstrated by rent prices continuing to rise and the vacancy rate falling for the third consecutive month to 1.9 per cent.
"If existing investors decide to sell, there will be a drop in supply, which will put upward pressure on rent prices.
"If existing investors decide the changes are manageable and elect to stay, but we see a reduction in new investment, supply will increase slowly but not at the pace needed to meet demand. And we need to keep in mind that it takes time to build a new home. A contract for a house-and-land package signed today will see a home added to supply in 12 months at best.
"And should investors sell, and fewer investors choose to enter the market, we could see a return to the crisis conditions of a few years ago. None of us want that."
Ms Brown also expressed concern about the impact of the reforms on the building industry.
"WA's building industry is already dealing with a range of challenges that affect the delivery of new homes, including the supply of land, delays in planning approvals, labour shortages, and delays in water and electricity connections. It is also being affected by the ongoing conflict in the Middle East," she said.
"Driving investors towards new builds will place more pressure on the industry, which is already at capacity. We could see completion timeframes extend and building costs rise.
"This reform will also put investors in direct competition with first home buyers who often look to new builds as a way to enter the housing market."
Capital gains tax changes
The existing 50 per cent capital gains tax discount will be replaced with an inflation-adjusted method from 1 July 2027. From then, any gain will be taxed at minimum rate of 30 per cent. This change applies to individuals, trusts and partnerships.
All assets (including housing) will receive the current 50 per cent discount on any capital gain until 1 July 2027, before switching to a pre-1999 inflation-indexation model for gains made after 1 July 2027. Investors who purchase new dwellings will have the option of using either the 50 per cent discount or the inflation-indexation method at the time of sale.
Investors who owned a property pre-Budget night but sell at some point after 1 July 2027 will apply the 50 per cent method on gains made prior to 1 July 2027, and then the inflation model on any gains made after that.
Ms Brown said it would be wise for investors to have their properties valued at this time to have a cost base to work from.
Investors who buy new dwellings and elect to use the 50 per cent discount option will also be exempt from having to pay the 30 per cent minimum tax rate when they sell the property.
Negative gearing
The ability to negative gear a residential property and offset the loss against other income will be limited to new dwellings from July 2027.
Investors that owned a property prior to Budget Night (including where a contract has been entered into but has not yet settled), will not be impacted by the change and will be able to continue to negative gear those properties and offset this against their other income.
A transitional measure will be in place for established dwellings acquired after Budget Night whereby they can be negatively geared and offset against other income until 1 July 2027, but not after that.
However, it is worth noting post July 2027 when an investor has excess losses on existing residential investment properties (purchased after Budget Night), they will be able to carry forward that excess to offset residential property income in future years.
Commercial property and other asset classes, such as shares, will remain subject to existing arrangements.
"Negative gearing helps aspiring investors build a property portfolio. Over time investors aim to become positively geared," Ms Brown said.
"The next generation of investors will be unable to do this in the residential market, unless they buy a new property. We may now see more investors look to the commercial property market or opt to invest in shares rather than residential property.
Read the Government's full explanations and examples of the reforms in action.
