Investors who borrow to buy property in Australia are facing changes to negative gearing and capital gains tax. According to REA Group economist Luc Redman, those changes tilt things slightly toward regional property and away from the big cities.
His reasoning starts with rent. In mining and farming areas, transient workers pay rents that are high compared with house prices, more than tenants in the cities do. Owners there who took on debt have long enjoyed better yields. Redman said that advantage is harder to find in metro markets. With loan losses no longer deductible under the negative gearing changes, he expects more investors to look outward.
The capital gains side works the same direction. Houses in the regions usually appreciate more slowly, so a smaller discount stings city owners more.
Redman also said the opportunity is “slightly” better, and he said it plainly. A future negative gearer has to begin with a new home, and doing that in the regions is riskier. Returns, he said, depend on future demand to live in the area, which needs “a strong industry underpinning or lifestyle attractiveness.”
Cameron Murray, chief economist at Fresh Economic Thinking, was blunt in the other direction. The tax changes, he said, do not favour regional housing over metro investments. Country houses pay higher rent yields because they are riskier to own, and the changes would affect both kinds of investment proportionately. “The net effect is a wash,” he said.
Where the new homes are
Murray argued that any shift toward new housing would show up where new housing already gets built. Historically that has meant the cities, which have grown faster than the regions in recent decades.
The Covid-era flight from cities, he said, is reversing a touch. “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.”
Population numbers show how large that flight was. Australian Bureau of Statistics figures put the regional gain at 43,000 people in 2020. About 86,000 people left Sydney between June 2020 and June 2022, and 60,000 Melburnians left over the same period.
