After last week dumping plans to reform negative gearing, the Turnbull Government has stepped up its scare campaign against Labor’s policy to channel negative gearing towards new homes and halve the capital gains tax (CGT) discount.
Last night, finance minister Mathias Cormann appeared appeared on the 7.30 report and dished up the following crud (my emphasis):
LEIGH SALES: Today one of your cabinet colleagues Peter Dutton said the election would be fought over Labor’s negative gearing policy. Isn’t it somewhat extraordinary that the Government is allowing the Opposition to dictate the battleground for an election campaign?.. Peter Dutton said today that if Labor’s negative gearing policy were passed, “The economy will come to a shuddering halt and the stockmarket will crash.” That’s an exaggeration at the very least, isn’t it?
MATHIAS CORMANN: Well, Labor’s – Labor’s negative gearing policy will drive down the value of established properties, it will drive up the cost of …
LEIGH SALES: Causing the economy to come to a shuddering halt?
MATHIAS CORMANN: Well you’ve asked me the question, if I may answer.
LEIGH SALES: As long as you address the question.
MATHIAS CORMANN: Well I am addressing the question. Labor’s absolutely reckless and irresponsible negative gearing policy will drive down the value of established properties, which is bad for the economy, it will push up the cost of rental accommodation across Australia, which is bad for the economy, it will make it harder for families to get ahead, which is bad for the economy, because what it will essentially – it will remove a basic economic freedom from people across Australia and that is to use their existing income and their existing personal assets to leverage into additional investments generating additional income, helping them to get ahead.
LEIGH SALES: Will it cause the economy to come do a shuddering halt – yes or no?
MATHIAS CORMANN: It will be bad for the economy if Labor’s negative gearing policy were to be implemented by a future Labor government and that will be very much part of the conversation that we will be pursuing in the lead-up to the next election.
This isn’t the first time that Cormann has lied about negative gearing’s impacts on rents. He was caught out last year making similar doomsday predictions on Lateline and on Radio National’s Drive program, both of which were debunked by MB.
Funny, too, how both Cormann and Dutton have warned of economic Armageddon because Labor’s policy would reduce existing house prices, but conveniently fail to mention that it would also juice new home construction, thus adding economic activity and construction jobs at the same time as it increases rental supply (thereby lowering rents)!
Strange, too, that the Coalition opposes Labor’s negative gearing policy when it is entirely consistent with its own policy on foreign investment into real estate, which restricts foreign nationals to purchasing newly constructed dwellings only in order to boost supply and economic activity. Here’s the chair of the foreign investment inquiry, Liberal MP Kelly O’Dwyer, explaining the benefits of this ‘new homes only’ policy:
Currently the framework seeks to channel foreign investment in residential real estate into new dwellings in order to increase the housing stock for Australians to build, buy or rent. Foreign investment is encouraged in new dwellings whether they be apartments, units or homes because in addition to creating more supply, it also creates more jobs for the building and construction sector – all of which helps to grow our economy.
The Coalition’s cheer squad over at The Australian have joined in the scare campaign, with David Uren writing the following stupidity (my emphasis):
The reason the rental yield is so low is because the market is driven by investors who don’t care about the annual return because they are focused on the eventual capital gain. Those gains have been delivered across the past 25 years as interest rates have fallen, which has increased borrowing capacity. But that cannot drive gains in future. In other nations, where the tax advantages of property investment are not so skewed to capital gains, rental yields are typically higher. Labor’s policy radically changes the outlook for potential new investors in property. Once 75 per cent of capital gains are taxed at an investor’s marginal rate and costs can no longer be deducted from other income, investors will be looking to get a return from a higher rental yield.
With the demand for rental accommodation unaffected by the tax change, the adjustment would be achieved by the withdrawal of investors from the market until property prices fall and a shortage of rental property pushes up rents to a level where the yield becomes attractive.
The policy attempts to support the new supply of rental property by exempting investment in new housing from the negative gearing prohibition. However, investors will understand they cannot achieve the capital gain that justifies negative gearing because they would be selling to buyers without that tax advantage. The supply of new investment in the housing market would fall.
The major flaw in Uren’s argument is the statement “with the demand for rental accommodation unaffected by the tax change…”. Quite frankly, it is misleading to present the problem this way given that 93% of investors purchase existing dwellings. Hence, they are not increasing housing supply, and are merely substituting homes for sale into homes for let (see next chart).
If negative gearing was quarantined for existing dwellings, and less investors entered the market, who does Uren think would instead buy these homes? That’s right, renters. In turn, those renters would be turned into owner-occupiers, thereby reducing the demand for rental properties, and leaving the rental supply-demand balance (and rents) unchanged. It’s hardly rocket science.
Uren’s twisted logic that channeling negative gearing towards new builds would magically reduce supply is equally ridiculous. And again, it contradicts the Government’s own policy on channeling foreign buyers towards new builds in order to boost supply.
I will remind readers once more of Malcolm Turnbull’s comments in his 2005 tax policy paper, where he described negative gearing and the CGT discount as a “sheltering tax haven” that is “skewing national investment away from wealth-creating pursuits, towards housing”, and has caused a “property bubble”. Turnbull also acknowledged that “Australia’s rules on negative gearing are very generous compared to many other countries” and that “the normal deductibility principles do not apply to negatively geared real estate such that the taxpayer is not obliged to demonstrate that the negatively geared property will generate positive cash flow at some point in the distant future”.
Let’s also not forget that just a few weeks back, Treasurer Scott Morrison, despite having deep ties to the Property Council of Australia, admitted on Sunrise that there are “excesses” in negative gearing:
And let’s not forget former Treasurer, Joe Hockey’s parting address to Parliament when he admitted that negative gearing was a failure and called for it to be restricted to newly constructed dwellings only, so that it actually boosts supply:
“…negative gearing should be skewed towards new housing so that there is an incentive to add to the housing stock rather than an incentive to speculate on existing property…”
Deep down, the Turnbull Government knows negative gearing and the CGT discount are rorts that go too far. But instead of making sound policy in the national interest, they are running a self-interested scare campaign aimed squarely at landing another term.
Again I ask, what happened to this Malcolm Turnbull?
“Ultimately, the prime minister has not been capable of providing the economic leadership our nation needs… We need a different style of leadership. We need a style of leadership that… respects the people’s intelligence, that explains these complex issues and then sets out a course of action that we believe we should take… We need to respect the intelligence of the Australian people. We need to restore traditional cabinet government [and] put an end to policy on the run and captain’s calls”.
– Malcolm Turnbull, launching his leadership challenge, 14 September 2015.
