BIS Shrapnel throws negative gearing modelling poop

By Leith van Onselen

BIS Shrapnel has today joined the monkeys throwing negative gearing poop with new “modelling” for a “confidential client” (we’d guess the property lobby or the Liberal Party backbenchers we know were mulling this) that forecasts impending doom if negative gearing is limited to new dwellings, as proposed by Labor.

Below is a summary of the modelling’s assumptions and findings:

Assumptions:

Abolition for established dwellings – removal of tax deductibility of losses on established residential property against general income

New properties exempt – the change applies to established dwellings only; new dwellings continue to attract concession as per usual

Grandfathering – the new policy applies to purchases of property made on or after 1 July 2016, but purchases of property made before 1 July 2016 would not be affected

Deductibility within property portfolio – no restriction on negative gearing deductions against another property owned by the same taxpayer • No change to related taxes – capital gains tax and stamp duty remain unchanged

No change to other asset classes – negative gearing offset remains for shares, etc

In effect, the current negative gearing tax provision would be replaced by ‘neutral gearing’, for established properties. We find that limiting tax deductibility of negatively geared residential investment properties would have consequences that go well beyond any tax saving to the

Impacts:

Rents will rise by up to 10% ($2,600) per annum

New home building will shrink by around 4% nationally, or 7,200 dwellings a year

GDP would shrink by around $19 billion per annum on average, equating to some 1% of Australia’s $190 billion annual income

175,000 fewer jobs would be created over the next 10 years, resulting in the unemployment rate rising from 5.8% to 5.9%

Government revenue across a range of taxes would shrink by $1.65 billion per annum

70,000 extra households would be pushed into housing rental stress

If the government were to compensate these stressed households, it would require an additional subsidy outlay of $650 million per annum.

So, restricting negative gearing to newly constructed dwellings would somehow crash dwelling construction, raise rents, and destroy employment, the Budget and the economy? Even in its own terms this makes no sense. How does a sagging economy and rising unemployment lead to a rental cost spike? Hint: it doesn’t.

At MB we accept that there would be a short term economic cost with long term benefits as growth shifts from house prices and consumption to construction and tradable sectors as interest rates and the dollar fall, but it is absolute tosh to say that that will result in rising rents. Even Master Builders Australia has admitted that Labor’s policy would boost dwelling construction by 5,000 homes, but complained that it did not go far enough to boost supply.

In response to this new low in lobbying, Labor’s shadow treasurer and assistant treasurer, Chris Bowen and Andrew Leigh, issued a press release debunking BIS “modelling”:

Building Industry Services, BIS Shrapnel, has released a report on changes to negative gearing that is purporting to be Labor policy.

It ain’t Labor’s policy. It isn’t modelling. And it is not analysis that stands up to any scrutiny.

And by the way, who was the private client who commissioned it?

The report is full of incorrect and quite frankly bizarre assumptions.

On the ‘policy’ assumptions, there are five critical assumptions that depart from Labor’s policy:

· The analysis assumes that negative gearing remains for other assets such as shares (not Labor’s policy)– making this assumption makes it a lot easier for the authors to ‘assume’ that investment flows would be diverted away from housing. This completely discredits the analysis on investor demand.

· The paper assumes losses can only be deducted within the property portfolio (not Labor’s policy) – this is far more restrictive than Labor’s policy, which allows losses to be deducted against broader investor income.

· It assumes no changes to the Capital Gains Tax discount (not Labor’s policy)

· Assumes (implicitly) that investors can’t carry forward unused losses against the final capital gain (not Labor’s policy) – this element would overestimate the impact on investor behaviour.

· The policy start-dates are July 2016 (not Labor’s policy)

The only empirical analysis in the report confirms that there will no notable changes to rents or dwelling prices. This is exactly what Labor has been arguing. The central assumption in the paper is that rents will rise and house prices will fall, but on the last page of the report states that: “neither rents nor dwelling prices displayed any notable change of behaviour or deviation from trend during 1985-87 [when negative gearing was abolished]

BIS is trying to have it both ways by arguing that landlords will raise rents but be deterred from continuing to invest in new properties because of diminished expectations regarding future returns.

There is virtually no mention of ‘owner occupiers’ in the report, another critical flaw. Although it does briefly flirt then ignore the truth of owner-occupiers coming into the market, saying on page 10: “In reality prices will be somewhat supported by owner occupiers and positively geared investors”. The reality is demand is made up of investors and owner occupiers, and owner occupiers will be the big winners under Labor’s policy.

For the sake of transparency, BIS must disclose which lobby group paid for this loaded modelling.

[email protected]

Comments

  1. lukehowardMEMBER

    On NewsRadio, BIS said it was not a political organisation nor a lobby group, but rather a commercial entity. So perhaps Domainfax?

  2. StomperMEMBER

    Listening to SloMo this morning on ABC702 I thought he was going to have an orgasm as it was clear he was using this rentseeker porn to wrestle the chicken.

    • I was disappointed that he wasn’t asked to swear on the bible about knowing who sponsored the BS Shrapnel report.

  3. “Rents will rise by up to 10% ($2,600) per annum”

    The old ‘up to’ gotcha.

    Also, Labor confirms the rich will continue being able to negatively gear established property:

    “Labor’s policy, which allows losses to be deducted against broader investor income.”

    • “Labor confirms the rich”

      Or the more diversified. Must admit that that I don’t know why Labor didn’t propose quarantining the deductions to same asset class though. Or why they didn’t got back to the indexation method for the CGT discount.

      Edit: Here’s the best info I’ve found so far on Labor’s plan. Allows you to skip the fluffy rest of the site. http://www.laborsplanforhousingaffordability.com.au/labors_plan

      • Yeah fair call, wouldn’t necessarily need to be rich per se to have a few thousands dollars in investment income to offset with property losses.

        I had previously thought quarantining per asset class may have been ok, but then you will have this subset of property investors who are already positively geared who will still be able to negatively gear new purchases…

      • We could even hope that it might encourage people to consider positively-geared investments to go alongside their negatively-geared property. But that’s probably a bit too much to expect here in Straya.

        I would like to see Labor’s reasoning for the choices that they’ve made (or not made, like returning to CG indexing) but unfortunately I don’t think we’ll get that level of detail.

      • drsmithyMEMBER

        I had previously thought quarantining per asset class may have been ok, but then you will have this subset of property investors who are already positively geared who will still be able to negatively gear new purchases…

        I don’t think anyone has a problem with claiming losses against income within the same asset class.

        “Negative gearing” generally means claiming a loss against unrelated _salary_ income, not claiming a loss at all.

  4. Unfortunately for most of us who want to see change, the average Australia Mum and Dad Bogan do not care for facts, they only care about headlines and morning TV.

    Whoever commissioned this knows that.

    Labour need to counter this shit on Primetime, not Question time.

    Unmask the rentseekers, parade them naked through all media channels, put a face to them, make neighbours hate each other…..this is a battle of haves and have nots, the have nots don’t know why they aren’t the haves next door……show them!!

    • Labor doesn’t need to do anything! The majority of the population want house prices to drop! The libs are selling the labor policy every time they open their mouths.

  5. So, Labor’s policy is to abolish negative gearing in all instances except new housing? That sounds like picking winners to me.

    The policy has legitimate uses elsewhere (i.e. with small businesses who may/often run at short term losses). For small business, cash flow is king and NG helps with their cash flow management (and the policy is not rorted by small business like it is in established housing – it’s much more difficult).

    If Labor’s going to get rid of NG for 95% of its current uses, get rid of it 100%, otherwise leave it alone (considering we all know that the CGT discount is the elephant in the room,I’d prefer to see NG remain untouched with our focus shifting to CGT)

    • “That sounds like picking winners to me.”

      Sounds like using tax policy to promote something that society apparently wants (more housing). Which is pretty damn common and normally a good idea.

      • That’s fair enough. However, it’s not NG that’s the problem. It’s the CGT discount. Two wrongs dont make a right.

        Fix CGT and stop providing land owners with incentive to underutilise their holdings. Problem fixed.

      • “It’s the CGT discount.”

        Yeah, I agree that’s the biggest problem. I do think negative-gearing helps with the selling of a loss-making (hopefully balanced out by CG) investment class though.

      • Of course. Personally I think it’s inadequate in addressing the problems it had created with NG of property.
        If CGT reform were done correctly, we wouldnt even need to discuss NG. No one is discussing CG though. Why 25%, why not get rid of it? Why grandfathered?

        Personally, I’d like to see real capital gains (indexed to CPI) taxed with zero discount, with no grandfathering. It’s amazing how little airtime this is getting, or even what the Coalition’s policy stance is (and I susptect they’d like to keep it that way)

  6. I think I’m at the point where I don’t care what happens anymore. It is plain to see that Negative Gearing if distorting the market and benefiting the higher echelons of society. Every day a new lobby group or vested interest launches “Independent Advice” which supports their view point. Really no change will occur and in the end the world will stop lending to us and it will fall. Until that, it is going to stay the same as property investment is enshrined in Australian culture and it is almost impossible to change that.

    (As an aside, I really don’t know how BIS or Deloitte Access and the other “Independent Advisors” can look in the mirror. Really these types of groups are another vested interest on the gravy chain.

  7. Ronin8317MEMBER

    If landlird can raise rent to become ‘neutral geared’! they would already have done so!!
    I wonder how much it’ll cost to commission an economic report from them saying Labor’s negative gearing change will cause World War 3 and an alien invasion from Martians.

  8. No matter what the tax settings there can only be as much construction as the drip feeding of economically viable rezonings will allow. Economically viable means an increase in value of the property sufficient to make the existing owners sell and a developer want to buy and build. Many medium density zonings in Sydney are not economically viable as the houses are worth more to their existing owners than a developer will pay, or even worth more as residences to a new occupier than a developer will pay after doing the numbers.
    Demographia consistently argues that the main problem is planning restriction on supply of suitably zoned land, and rarely if ever raises the issue of tax policy as being a major concern.

  9. They are correct in what they are saying about a drop in Construction. If property prices drop in general, construction will drop significantly because developers will stop developing when there projects don’t stack up.

    There may be a short term increase but as soon as buyers realise that the value of new properties drop as soon as they buy them (because an investor wont buy the old property), they will stop buying new properties.

    Also, there has been no talk on limiting deductions on interest for loans for buying shares, if labours policy is for is to restrict negative gearing on houses only money will begin to flood into the share market i.e Margin Loans.

    • Also, there has been no talk on limiting deductions on interest for loans for buying shares, if labours policy is for is to restrict negative gearing on houses only money will begin to flood into the share market i.e Margin Loans.

      Labor’s policy is to remove negative-gearing for all assets (including shares) with the exception of newly built housing.

    • If developers can afford to sit around doing nothing, good luck to them.

      Alternatively, they might reduce the amount they’re willing to pay for land (which has been the biggest contribution to the bubble), and find that they’re still able to make just as much money as they previously were.

  10. Up is down
    Black is White
    …and encouraging investment in housing construction will cause it to fall