SQM flip flops on Labor negative gearing support

By Leith van Onselen

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 If negative gearing was repealed or altered, investors who are now gobbling up property would back off buying houses, which is what those who are demanding lower dwelling prices want to see…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”.

On 17 April 2015, Christopher continued:

Louis Christopher this morning told SmartCompany he was disappointed in the Prime Minister’s “hypocritical” decision to leave negative gearing unchanged.

“Now would have been a perfect time to implement changes, given the market is on a little high, it would have been able to withstand any changes now, rather than in a period of downturn,” says Christopher.

Christopher says given the backdrop of the budget black hole and a housing affordability crisis, a reform would have been a “vote winner” for the Abbott government.

“Tony Abbott now has hardly any leg to stand on when talking about tax reform and tightening our belts and so forth,” he says.

“The changes will fall on the working class, when he’s willing to give breaks on big companies and breaks on investors, it’s hypocritical. This will be a vote loser”…

Christopher also says the decision seems to go against the direction of Abbott’s own Treasurer, Joe Hockey, and believes the PM is listening to “self-serving” voices and not looking at the bigger picture.

“It’s stupid from a property market perspective. He’s failed.”

This year, Christopher has continued the push for negative gearing reform. In February, he appeared on Sunrise to argue the case:

Here’s the money quote:

“The notion of having negative gearing on new property is not a bad idea because I think that will encourage supply and puts the concession where we need it most, and that is increasing the supply of new real estate, which will keep the rents at a stable level and make sure that we don’t have a long-term housing bubble”.

A few days later, Christopher appeared on The ABC arguing that Labor’s policy would most likely lower rents:

DAVID TAYLOR: [Christopher] says there’s no clear evidence that the Labor government’s policy to scrap negative gearing in the 1980s led to higher rental prices.

LOUIS CHRISTOPHER: The truth is that the rental period at that time, across Australia, was mixed.

There were some cities during this time which recorded falls in rents; there were other cities, namely Perth and Sydney, which were recording rises in rents above and beyond inflation.

DAVID TAYLOR: Louis Christopher, based on your numbers though, do you suspect that rents would rise if negative gearing was taken away, as property investors try to make up for some of the other expenses?

LOUIS CHRISTOPHER: What Labor has actually put forward is about stimulating new supply of property, so we think that that would put a little bit of a dent in that whole argument that “look, rents would dramatically rise”, because what they’re trying to do here is actually stimulate the supply side, and we think they would have some success in doing that.

And later in February Christopher argued that there would be no rent spikes or market decimation under Labor’s policy:

“Would there be a surge in rents?

In our opinion, we think no. And that is based on what happened in history as well as the fact that if Labor’s policy passed, it would keep negative gearing on new property…

Labors’ proposal to keep negative gearing on new properties would most likely ensure a strong supply side response to the market. We have seen such directed stimulus work on the markets before, namely in the form of various first home owner grants, so we are confident, the market is responsive to such stimulus.

We believe that should Labor’s proposal succeed there would be an adjustment period where, yes, many investors may stay away from existing property for a period of time, but only until such time that a rise in yields gives them incentive to start buying existing properties again. This would happen as investors would demand a higher yield to offset the lack of tax concessions.

But such a period would not go on forever. Once yields are higher, investors would then re-enter the market. Potentially yields could rise to the point where existing residential properties are cash-flow positive from day one, or at least, cash flow neutral. Which I believe would be a positive for the asset class over the long run…

But this adjustment does not necessarily mean there would be an outright “decimation of the market”. We may well likely see for example a period of stagnation in property prices for existing property. Or prices rising more slowly than rents”.

Then in March 2016, Christopher slammed the dodgy BIS modelling’s claim that rents would rise by 10% under Labor’s policy:

SQM Research managing director Louis Christopher also called the report’s findings, in particular a rent increase of 10 per cent, “hard to believe”.

“We think the opposite would play out – there would be a moderate increase in supply,” Mr Christopher said.

“Negative gearing is an existing distortion and the market will eventually adjust to the new reality,” he said.

So, why am I taking you on this long walk down memory lane? Because SQM Research has now released analysis arguing that the property market would likely experience a prolonged contraction and rents would rise in the medium-term under Labor’s policy, which obviously contradicts Christopher’s previous statements.

Below is the media release:

SQM Research, Australia’s most respected property investment research house, today released a report into the likely housing market effects of The Labor Party’s proposal to change negative gearing.

Key findings

Yields to Rise

International comparisons, historical precedents and the effective grossed up yield benefit all indicate that acquisition rental yields are likely to rise between 90 basis points and 1.1% over a two to three year period post the implementation of the new policy. Average acquisition yields therefore may rise from approximately 4.4% up to 5.5%.

Rents to Remain Stable – Initially

Rental changes are initially likely to be negligible with rental growth remaining at current levels of between 1-2%, nationally. However there may be some upwards pressure from year three (2020) due to an expected decline in completions, which in itself may occur due to the forecasted downturn in the market. SQM Research believes market rents could accelerate to 6% in a worse-case scenario.

Dwelling Prices to Fall

Given the forecast of initial negligible rental growth, SQM Research forecasts a correction in the housing market of:
• -3% to +1% in FY2018
• -8% to -3% in FY2019
• -4% to -2% in FY2020.

The positive end of the range takes into account a response rate cut of 50 basis points by the RBA. The negative end of the range assumes no rate cuts in response.

Downturn Period to Last between Two to Four Years

The total adjustment in the market housing market is forecasted to last between two to four years with most of the adjustment phase occurring within three years. Thereafter the market would likely potentially return back to equilibrium, having ‘priced-in’ the loss of the tax concession.

Sales Turnover and Stamp Duty Revenue to Slump

Property sales turnover is predicted to fall 17% to 20% with most of the declines in sales to occur in the first year (FY2018). This would result in a fall in aggregate state stamp duty revenue of between $3.1 billion to $3.8 billion.

Off-the-plan Investors at Risk

Investors seeking to benefit from the new concession by buying new properties/off-the-plan developments are exposed to a substantial risk of their property being valued below purchase price, especially if the investor is seeking to sell their investment within the first three years.

Managing Director of SQM Research, Louis Christopher, said “In short, there will be a market impact if Labor’s Negative Gearing Policy is legislated.

Our analysis suggests the market impact would last by around three years with sales falling significantly in year one and a correction to take affect with dwelling prices falling the most in the second year. We think there would be a possible response to this event with the RBA cutting rates, thereby mitigating some of the potential price falls. We don’t think the market will crash per say, but it will be felt by the economy. We then expect the market to return to equilibrium from year three.

We strongly encourage Labor to consider some of the investor issues, particularly surrounding the distortion their policy may create on pricing of off-the-plan developments and the likely losses investors in those properties would face come resale time to those who won’t have the tax concession.

While we take the view that negative gearing reform is a good thing, such reform should be done as part of a wider property tax reform that should include a broad based land tax and the elimination of stamp duties. Such reform should have a phase in period of up to three years. Doing so would reduce the risks of a significant downturn which would likely have wider ramifications on the economy.”

So, after banging the drum loudly on negative gearing reform for several years, SQM now believes that reform should only take place as part of a “wider property tax reform” program, which is a pipe dream.

SQM is also overly concerned that Labor’s policy would create “distortions” in the “pricing of off-the-plan developments”, despite arguing previously that the existing negative gearing system is “a highly distortionary policy” and calling for it to be shifted towards new builds.

SQM also seems to assert that Labor’s policy would push-up rents by up to 6% in the medium-term, despite arguing previously that it would likely have the opposite effect, thanks to its stimulatory impact on new construction.

Even on stamp duty, SQM has failed to mention that it is a highly volatile tax under current tax arrangements and due for correction anyway, as illustrated by the below chart on NSW:

ScreenHunter_13664 Jun. 22 06.50

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.

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Unconventional Economist
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  1. Haha oh boy. I bet you every realestate agent as part of thier current campaign against Ng emai bomb poor old sqm demanding a change or they will cancel thier subscription.

  2. Louis is just following the lead of your venerable Leader – believe one thing, do another…
    Whataver rules or changes you put in place will be irrelevant anyhow. So I guess he’s just re-joined the winning side.

    The boss of an Auckland-based Chinese law firm says Chinese buyers will get around the ban by banks. “There is a phrase in China that is called ‘上有政策,下有对策’ which when you translate it is saying ‘when the Government has a policy we have a way around it’. She says Chinese are used to stringent policies, and “consider non-compliance as a first option for any newly introduced policy”

    Malcolm and John Key here, are telling the rest of us laggards to be like Louis, and follow the Chinese lead.

  3. His message has always been floppy since he started SQM.

    You don’t make a living in Australia I selling property information if you are a crashnik or not a booster. He has to make a living, so he has to be a booster.

    • In most cases he just calls it as he sees it as opposed to what he wants to see as some do. That results in what you call flip-flopping, I consider it being a realist.

      • BB,

        WTF, “In most cases he just calls it as he sees it as opposed to what he wants to see as some do. That results in what you call flip-flopping, I consider it being a realist”

        He took a strong position against NG for a long period and suddenly he sees it so differently. Has something suddenly changed, the earth shifted? This isn’t just a small shift in opinion, some sort of nuance on his previous position, this is 180 degrees opposite to what he’s stated for some time. Was there something he didn’t know before? It’s not as if he had rushed to judgement on this, so flip-flop it is!

        For me it’s real easy; loss of work.

      • Dennis, Peachy suggested Louis has been flip flopping since he started SQM… if you agree, when was the last such example that you can recall (other than this negative gearing one)?

  4. ALP needs to put out a few Negative Gearing Ads such as:
    A young family, with a few kids bidding at an auction for an small run down house, they are hopeful and excited, but are beaten by a property investor.
    As they walk away the wife is crying and the kids are asking why they cannot buy a house.
    A sold sticker goes up followed by a for-lease sticker.
    Cut to the investor bragging about how he has just purchased his 6th investment and how he pays hardly any tax.

    • TheRedEconomistMEMBER

      I like it…. Cmon ALP media guys…. Just do it…

      This happened to me many times when I was looking for a home for my family to live in.

    • Spot on !!.

      So why don’t they produce such an advertisement?

      Obviously ….. they REALLY don’t give a shit.

      They are all scum. Maybe Turnbull and Shorten text each other at the end of each campaign day joking about who ‘took the piss’ the most.

      A complete charade

  5. Phil the engineer

    Wow.. dismiss anything that doesn’t agree with the narrative… I’m not sure why everyone here is pretending that removing ng won’t affect the market. Of course it will. That’s the point. Louis seems to have his finger on the pulse more than anyone else in the last few years. It would have been nice if he just presented the numbers and kept the policy opinions to himself though.

    • Of course they will affect the market. No shit sherlock. But he should have made the case for why reform is still necessary.

      Also, his figures around rents don’t pass the laugh test. Why would Labor’s policy encouraging new builds cause them to rise? It also contradicts his previous statements just a few months ago.

      • He suggests why in the quoted text. Doesn’t expect an initial rise in rents (as a result of the policy), that would come several years from now after a potential down turn in prices, resulting in lower levels of construction.

        • Sure. But he should have explicitly said that over the longer-term, we should expect higher levels of construction and lower rents due to Labor’s policy. That is, a higher equilibrium level of construction. But he instead refused to make that obvious assessment.

        • Yes. But he never explicitly says that Labor’s policy would likely cause a higher equilibrium level of construction than under current policy arrangements and therefore less rental pressures over the long-term. This is the logical outcome and also what Louis has argued previously.

          He also never explicitly states that current arrangements are massively distorting the market and that Labor’s policy would unwind some of these distortions. Instead, he harps on about relatively minor distortions in the off-the-plan market, giving the impression that Labor’s policy is adding to distortions.

          He should have made these observations up front in the media release – that Labor’s policy is better than maintaining the status quo – to ward off the inevitable scare campaign. Instead, he has given fuel to the property lobby.

      • “..we should expect higher levels of construction..”

        This assumes two things:

        1) A larger number of local investors will be encouraged into the riskier OTP/new build market from mid 2017 when Macro Business has already predicted home prices will be falling.

        2) If more property investors do move into that space, investors will create new demand as opposed to outbidding home buyers.

        I am not convinced Labor’s policy will add substantial upward pressure on the number of dwellings constructed (though at this point it’s looking likely we won’t have the opportunity to find out).

    • Actually, it is you that is the disgrace for the selective reporting.
      In the report, we have vouched for a broad based land tax with the elimination of stamp duties. We still propose negative gearing reform. We have also made it clear in the past NG should be phased in and we don’t like the position OTP investors would be in. How can you guys possibly argue that Labor’s proposal wouldn’t have an impact?? Isn’t that what you want anyway? Falling house prices? There you are. You have it!

      • Geez Louis. We acknowledge there would be an impact. DLS analysed these months ago. You missed it, obviously.

        My issues are the following:

        1) In your press release, which is all that 90% of people read, you have not acknowledged up front that the current system is highly distortionary and that Labor’s policy is an improvement (albeit imperfect).

        2) you note that rents will rise in the medium-term without acknowledging that the longer-term impacts will likely be beneficial (via higher equilibrium construction).

        3) you bang on about the ‘distortions’ in the OTP market without noting that the current system is way more distortionary.

        4) you claim that you support NG reform, but only in concert with other things like SD reform and broad-based land taxes, which is a pipe dream.

        More generally, you have to go deep into the report to find any caveats. As a result, you have given oxygen to the property lobby and the Coalition to oppose Labor’s reforms, when your report should have strongly supported them, albeit acknowledging some short-term market consequences.

        You have set reform back, not forward. Hence articles like this appearing in the MSM.

    • Come now, Louis. We don’t disagree with your price assessments. We disagree with your rent assessments.

      You’ve set back essential reform, Louis, after being its champion for years.

      Shocker, mate.

      • ?? The report clearly states rents wont be going up in the first 2 years. However there is uncertanty after that point. You think investors in OTP will be happy in the knowledge that they will likely lose out on their investment come sale time? Then have a think about what that means for demand for such properties. Please dont shoot the messenger here. Labor should have thought this one through some more.

        • Some questions Louis. Would directing NG to new construction have a positive impact on construction or a negative impact on construction in the longer-term? Simple yes or no?

          Also, shouldn’t dwelling construction have crashed when FHB grants were shifted to new builds and following the crack-down on foreign investors buying existing property?

          Finally, are Labor’s reforms better than maintaining the status quo? If yes, then why didn’t you explicitly say so in your report? And if not, why have you changed your position?

      • I had no plans today in my work schedule to have a debate with you, gents. However, assuming a fair ,open and live format, I am happy to have that type of public discussion..Either tomorrow or another day. Let me know.

  6. Echoes of a few years back, when kpmg did modelling for treasury in support of the rspt and then, after being leant on by other clients, did modelling for the mca criticising the rspt…
    Such is life in the corporate advisory world…
    These guys value a buck more than their credibility!

  7. Dear xxx

    Thankyou again for the opportunity to spend some time with you talking through some of the common misunderstandings around the Australian housing market. As you know, the Property Council is an enthusiastic advocate for creating a healthy and dynamic housing market in this country, and we rely on the support of key people, businesses and institutions such as xxxx. As discussed, here are some example discussion points that you may find useful in conversations with colleagues or the media. We have attempted to frame this argument in language that is reasonable, anodyne, elusive and impermeable to logic.

    We look forward to continuing our discussions with xxxx on the ways in which we can help to support your work.

    Best regards

    I agree that reform in this area is something that needs to be reviewed, but as many experts in this field have already pointed out, we need to look at the broader picture around housing supply and pricing, and make sure we are addressing the problem at its core. It is a very dangerous thing indeed to attempt to somehow engineer a fall in the price of houses in order to make them more affordable. We risk increasing the cost of renting, which would affect the one in four people in this country who are currently renting their place of residence. We risk endangering the retirement incomes of a large section of the Australian community, who currently own their own home or invest in property. We risk stifling the construction of new properties, which would actually reduce the supply of new dwellings coming into the market.

    Such a decrease in supply would only serve to further decrease the price of houses, creating a negative feedback loop of falling prices, reducing supply, higher rents, less jobs and less growth. It is in the interest of all Australians to ensure that we maintain a healthy housing market, and that means supporting prices at a level that encourages new investment in housing supply. It is only through strong prices that we can encourage the release of new land, the construction of new housing, and the growth in jobs and the economy that together will all help to increase the opportunity for as many hardworking Australians as possible to be part of the housing market.