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:
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
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.