Two economists looked at the same set of Australian housing tax changes and came to opposite conclusions about the regions.
Luc Redman, an economist at REA Group, said the changes to capital gains tax and negative gearing “provide a slightly more favourable opportunity for regional property relative to metro.” He tied that to how regional property behaved before the pandemic. “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.”
The yield argument
Transient mining and farm workers typically pay rents that are high compared with the price of the house, more so than tenants in the cities. Redman said areas with established mining and farm workforces have always offered higher rental yields to owners who borrowed to buy.
“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.
Regional houses usually gain value more slowly. So cutting the capital gains tax discount, the report noted, hurts metro owners by comparison.
There is a catch. Anyone wanting to negatively gear in future must start with a new home, and that carries more risk in the regions. “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,” Redman said.
“A wash”
Cameron Murray, chief economist at Fresh Economic Thinking, did not accept that the changes favour the regions. Country housing earns higher rent yields because it is riskier to own, he said, and the tax changes would hit city and regional investments in proportion.
“The net effect is a wash,” Murray said.
He also doubted that buyers would shift toward new homes outside the cities. “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.”
Murray said a pandemic-era trend was turning, too. “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. Between June 2020 and June 2022, about 86,000 people left Sydney and 60,000 left Melbourne.
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- ‘Reversing’: Changes that flip housing trend
