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Election2019: Labor housing policies not lethal, says Morningstar

Morningstar Analysts  |  17 May 2019Text size  Decrease  Increase  |  
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Housing affordability is a pivotal component of Labor's platform, which contains policies intended to further reduce house prices.

Before 2019, property prices across Sydney, Melbourne, and other capital cities rose at a torrid 7.6 per cent annually between 2012 and 2017, but fell 5.1 per cent in calendar 2018 as banks and regulators tightened lending availability and sentiment softened.

Two key Labor policies are:

  • a removal of negative gearing for purchasers of existing property
  • a reduced capital gains tax discount, to 25 per cent from 50 per cent.

Both are proposed to start in 2020, and for buyers after this date only; existing owners will be exempt.

The removal of negative gearing will have the biggest effect, Morningstar says.

The cut to the CGT discount could lead to lower price as new buyers would be locking in reduced after-tax returns, but the tax won't be owed until the property is sold. The impact of the change will only be felt for buyers around 12 months after 1 January 2020.

Australian capital cities see property prices cool

House prices

Source: Australian Bureau of Statistics

Conversely, the removal of a tax break for negative gearing will hit new investment-property owners' pockets immediately after an existing home is purchased post 1 January 2020.

One criticism of negative gearing is the potential for fewer properties to be available for rent and average rents therefore ticking up. Nonetheless, there are offsetting factors:

  • The investor portion of home lending has already fallen dramatically in recent years, down 21 per cent and 15 per cent in NSW and Victoria. Though annual growth in rents has slowed to 0.4 per cent from around 3 per cent a few years ago.
  • When negative gearing was last removed in the period between 1985 and 1987 – though we concede inflation and interest rates were at much higher levels – only Sydney and Perth experience sizable rent increases. Tellingly, these were the areas of lowest rental vacancy during the period.
  • Finally, existing owners, who are grandfathered into negative gearing benefits, will have no reason to increase tenants' rent, meaning purchasers after the change in policy will need to remain competitive with these current properties so long as vacancy rates remain elevated.

Effect on Morningstar's outlook for banks

Morningstar’s base-case outlook for the Australian major banks is tied closely to the outlook for the broader economy. Nonetheless, we are confident our key valuation drivers are achievable and reflect weaker operating conditions that include downside from Labor's announced tax and policy changes.

As a result, we think the banks' equities are already pricing in this risk, trading at discounts to our fair value estimates.

Morningstar’s five-year base-case forecasts assume residential credit growth to average around 3 per cent, with a softer outcome in fiscal 2019 and fiscal 2020. Potential fallout from changes to negative gearing and CGT rules could detract from Morningstar’s credit growth forecasts, but even so, it does not expect credit growth to turn negative.

Though online real estate advertising firms REA Group (ASX: REA) and Domain (ASX: DHG) have both been affected by real estate weakness, Morningstar expects real estate listings to rebound from cyclical lows.

Both firms continue to increase revenue per advertisement, which has offset volume weakness to some degree, and should both capture a growing share of real estate marketing spending from real estate agents.

However, despite the positives, Morningstar continues to believe both REA Group and Domain are overvalued.

The full version of Morningstar's special election report entitled A Coalition Defeat Need Not Be Labor-ious for Your Portfolio can be found here.

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Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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