Economists divided over controversial housing tax changes as reform could lure property investors to regions

Economists say housing tax changes make housing investment in the regions more attractive than in big cities.

Because temporary mining and agricultural workers often pay relatively higher rents relative to house prices than those in cities, experts say changes in negative endowment make regional purchases a better option.

REA Group economist Luc Redman said changes to capital gains taxes and negative gearing “provide a slightly more favorable opportunity for regional properties relative to metro.”

“This is based on two key components that illustrate how regional ownership was evolving before the pandemic: trends that are starting to return towards normal levels.”

Mr Redman said regional areas with established mining and agricultural workforces always provided higher rental yields for property owners who borrowed money to buy property.

“These higher yields are certainly harder to achieve in metropolitan areas, and with negative gearing changes, they will likely attract more investors as their ability to mitigate loan losses is lost,” he said.

Cutting the capital gains tax deduction also hurts metro owners, as homes in the areas typically don’t increase in value quickly.

An investor looking to future-proof (which must be a new home to begin with) is taking on more risk in doing so on a property in the zones.

“The risk for investors pursuing this tactic in regional areas is that returns will depend on future demand to live in that area, meaning the area has strong industry support or lifestyle appeal,” Mr. Redman said.

Fresh Economic Thought chief economist Cameron Murray said the tax changes did not favor regional housing over metro investments.

He said that regional housing provides higher rental income because owning a house in the country is riskier, and that tax changes will proportionally affect city and regional housing investments.

“The net effect is washing,” Mr. Murray said.

“If the market has an impact on decisions to purchase new homes to replace existing homes, then this will need to happen in places where new homes are more common. But this has historically been cities that have grown faster than regions in recent years.”

He said that an important trend of the pandemic period has begun to reverse.

“Given that the flight from cities during Covid has now reversed somewhat, I don’t think there is much market demand for more new homes in the regions, except in specific cases where there are local resource booms.”

Australian Bureau of Statistics figures show regional Australia gained 43,000 jobs in 2020. Nearly 86,000 people left Sydney between June 2020 and June 2022, with 60,000 Melburnians leaving the big smoke over the same period.

Peter Tulip, of the Center for Independent Studies, said the capital gains tax change marginally benefited regional investors.

“I don’t think the tax changes will make a significant difference to regional real estate,” Dr Tulip said.

“Properties with relatively high rental yields, as we have seen across the country, are less negatively impacted than capital gains-based properties, such as those in the city, but the difference is small.”

Investment properties purchased after 19.30 on the night of May 12, when the federal budget will be announced, cannot be negatively affected as of July 1, 2027, unless the house is newly built.

But municipal zoning laws remain a stubborn obstacle to housing developments in regional centres.

Grattan Institute fellow Ashleigh Chang said these supply constraints are still the biggest handbrake.

“Regional markets may not be about to become ‘hot spots’, but like our cities, there are many regional areas where rents are high relative to prices because there aren’t enough homes,” he said.

“The binding constraint on supply in many regional areas does not appear to be due to investor appetite; the problem is that we have made it very difficult to build.

“If planning systems continue to block new supply, this ‘buy new and hold for return’ route actually becomes harder, not easier, in the regions.”

Ms Chang said regional councils should zone for higher density homes in city centres, clear more land on the edges of the city and ensure “a small number of objectors cannot hold up already approved housing for months”.