SQM Research’s managing director, Louis Christopher, has been a big supporter of negative gearing reform over the years.
Back in April 2014, Christopher penned a piece arguing that the best time to repeal negative gearing was when the housing market was experiencing a boom – i.e. like right now:
“In my opinion, if you were to time such a repeal, you would do it while the market was in recovery and not while it was having a downturn. Implementing such a change may also hold off interest rate rises”…
He also argued that restricting negative gearing to newly constructed dwellings only would likely keep construction going even if prices fell:
“… if the story above is correct in regards to keeping negative gearing on new dwellings, then we may well keep the dwelling construction side of the economy going”.
In 2015, Christopher kept the arguments to reform negative gearing flowing. On 11 March 2015 he noted the following with regards to the Abbott Government’s refusal to reform the tax lurk:
“We are of the belief that the less government intervention there is in the property market, the better. Governments all round should be doing more to promote housing affordability, not unaffordability.
Reducing negative gearing, a highly distortionary policy, would have a far more beneficial effect on promoting housing affordability. If negative gearing was repealed or altered, investors who are now gobbling up property would back off buying houses, which is what those who are demanding lower dwelling prices want to see…
So, if anything needs to be done, it is to eliminate existing distortions, and not introduce more”.
Christopher then followed-up on 30 March 2015 with a strongly worded piece arguing that negative gearing should be restricted to new dwellings in order to boost dwelling supply:
“I firmly believe negative gearing should be restricted to new residential real estate. By allowing negative gearing on new residential properties and off-the-plan developments, we are providing a proper tax benefit to where it is justified and needed most: the construction and development of new dwellings.
That was the original purpose of negative gearing. The tax benefit was actually first introduced in 1936 with the direct aim to increase the supply of housing and move the economy forward from the Great Depression.
The problem is when it is applied on existing properties there is no real tangible economic benefit. Instead, it is unnecessarily stimulating demand on existing housing and, therefore, pushing house prices artificially upwards and so, damaging affordability.
Now in all this, if negative gearing is restricted, it will unlikely mean dwelling price falls everywhere. The market is driven by many factors including population growth, interest rates, the exchange rate and, of course, the health of the economy. However, I would expect a moderate correction, where investor demand has been very strong in recent times, such as the Sydney housing market…
If governments wish to improve affordability in the market, restricting negative gearing to new homes would be ideal. It would stimulate new housing and reduce investor activity on existing housing”.
So rather than blaming any downturn on Labor’s negative gearing reforms, the states should instead seek to shift their tax bases to more stable and less distortionary land taxes.
There is also the argument that current tax arrangements are pro-cyclical, thus exposing the housing market, economy and state budgets to more volatility than would otherwise be the case (an argument made by the Murray Financial System Inquiry). Thus, Labor’s policy to unwind negative gearing and the CGT discount would help to stabilise the market over the longer-term.
In short, SQM seems to have flip-flopped on negative gearing, undoing its previous good work and giving oxygen to the Coalition and real estate parasites that want the lurk maintained.
Now wait for Scott Morrison and Malcolm Turnbull to use SQM’s report to slam Labor and scare voters.
Instead of being a force for reform, SQM’s report will unfortunately become the resistance.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
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