The AFR’s Robert Harley has posted an article today arguing that Labor’s proposed reforms to negative gearing and halving of the CGT discount would be “dramatic” and “damaging” to the housing industry, lowering house prices and pushing up rents:
The Shorten proposals on negative gearing and capital gains tax, will weaken house prices…
Shorten also said the proposals would “help lower costs for renters.” I think the opposite will happen and the Labor Party will be surprised at the pain they inflict…
There is nothing light-touch about the Shorten proposals. He is taking an axe to policies that have underpinned Australian housing for 20 years…
Many investors would simply not be able to buy in the current market, not on the current yields. And, when they sell, instead of paying 50 per cent of their marginal tax rate, they will pay 75 per cent…
No doubt some investors will chase the lure of negative gearing into new housing. As the spruikers have discovered some people will do anything for a tax break.
But the I think changes would dampen property investment across the spectrum…
The timing of the Shorten proposal, coming at the end of a boom, would also exacerbate its impact. The six month window from an (unlikely) election win would be tumultuous.
May I remind Harley that nearly 19 out of 20 property investors purchase existing dwellings (see next chart), so the only “damage” Labor’s policy would do is to speculation in established homes, which makes housing less affordable without boosting supply.
Why such a result would be “damaging” to Australia is curious, especially given Labor’s plan is estimated by the independent Parliamentary Budget Office to save taxpayers some $32 billion over a decade. Given Australia’s Budget is in a precarious situation, and Australians are facing funding cuts to important social services, I would have thought that removing a policy that is bleeding the Budget dry for no social benefit is a no-brainer?
Worse is Harley’s suggestion that Labor’s plan would raise costs for renters. Again, the current taxation arrangements have merely substituted existing homes for rent into homes for let, so they have done nothing to boost rental availability or affordability. They have also clearly crowded-out first home buyers, as shown in the next chart:
Therefore, less investment into established homes means more of them are available for owner-occupation.
Secondly, Labor’s plan will target investment into new builds, thus helping to boost rental supply. This extra supply will actually improve the rental supply-demand equation and in all likelihood lower rental costs.
Let’s be clear. Labor’s policy will save the Budget considerable money – tick. It will help make owner-occupation more affordable by removing speculative demand – tick. It boost dwelling supply and the associated construction jobs – tick. And it will likely place downward pressure on rents – tick.
About the only losers from Labor’s policy are the many rent-seekers in the finance and real estate industries who will have to cope with less household debt accumulation and lower capital growth.
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