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SMSF update on negative gearing and housing prices


We discuss the risk of a property crash and provide an update on negative gearing.

Australian property update – negative gearing

Declining tax claims due to negative gearing in Australia are largely a result of low interest rates relative to rental yields. In other words, the benefit of negative gearing has somewhat declined. There is a broader issue at play however, which is the political debate proposing to restrict negative gearing tax concessions to only new properties. The problem is that the main factor driving expensive property in Australia is constrained supply. Negative gearing also needs to be considered in the context of the tax system as a whole.

Are we heading for a property market crash?

Australian housing is expensive relative to incomes and rents. And household debt ratios are high. So yes, there is a risk of a sharp drop in property prices at some point. However, this is unlikely unless we see much higher interest rates or a surge in unemployment in the context of a recession. The foresight of the Reserve Bank to rebalance the economy in the face of the mining downturn means that both of these scenarios seem unlikely at present. However, there is always a cycle – we’re going to see a 5-10% fall in property prices at some point in the next few years much like we did around the time of the global financial crisis and around 2012. But at this stage it’s unlikely that we’re going to see a property crash.

About the author
Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.
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