Will Labor’s negative gearing reforms “crash” the property market?

By Leith van Onselen

After last week’s house price results from CoreLogic revealed a deepening correction, especially in Sydney:

Australian Treasurer, Scott Morrison, was quick to use the opportunity to attack Labor’s planned changes to negative gearing, warning they would ‘crash’ the housing market:

SYDNEY could face a crash in house prices throwing the economy into turmoil under Labor’s “dangerous” policies, Scott Morrison has warned…

The Treasurer said the “softening” of the Sydney housing market over the past 12 months as a result of the Government’s “delicate” policy change was necessary to tackle affordability…

[Morrison] seized on analysis released by CoreLogic yesterday which found Labor’s policies to wind back negative gearing and increase capital gains tax were “playing on the minds of investors” and have a “further dampening effect”.

“We (the Turnbull Government) took the very careful action we did through APRA (Australian Prudential Regulation Authority) to slow down the level of investor participation in the market,” he said.

“(It) was making … the imbalance between supply and demand an even bigger issue because there was this easy credit flowing through to investors”…

Mr Morrison feared that compared the Government’s “air rifle” strength change, Labor’s policies which he said were as powerful as “Clint Eastwood’s magnum”.

“Even if Labor thought in their madness that this is a good idea, two years later when the market has softened … the idea of going ahead with this now is arrogant and more importantly its incredibly dangerous,” he said…

Estimates of Labor’s policy’s impact on the housing market vary.

On the moderate side, the Grattan Institute forecast only modest declines in house values in the order of 2%.

Whereas a Freedom of Information request from the Australian Treasury also estimated that the impact would only be modest:

“The ALP policies could introduce some downward pressure on property prices in the short term, particularly if the commencement of the policy coincides with a weaker housing market,” they wrote.

“In the long term, increases in taxation on rental property could have a relatively modest downward impact on property prices”…

On the other hand, recent analysis by property consultants RiskWise Property Research and Wargent Advisory suggests a 9% impact on property values; albeit with significant variation around the country:

About -10% is the MB estimate. But that is only initially. The ongoing impact will be much higher given it will materially reduced future price growth, as well as increased supply (at the margin) from the policy remaining on new builds.

Furthermore, given Sydney (and to a lesser extent Melbourne) is where investors congregate most intensively, it is likely to be hardest hit:

This is particularly pertinent given investor finance has a very strong correlation with price growth:

There’s no doubt about it. Coming on top of the current correction, as well as the interest-only reset, it will be nasty for house prices.

That’s not to say that Labor’s policy is not excellent – it is. Malcolm Turnbull admitted so in his 2005 Tax Policy Paper, when 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”.

It’s just that Labor’s policy will likely arrive too late, at the wrong time, and exacerbate the downturn.

Nevertheless, MB hopes Labor will stick to its guns and keep persist with its policy should it win the next election. The only way to ‘fix’ housing affordability is through lower prices.

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Comments

  1. Only problem is once you that domino starts to fall there is no turning back. Lets face it though. Australia needs a massive housing correction.

    • That’s right, we badly need a (large) correction, don’t call it a crash, and to move on from our obsession with house prices, so our kids can have a life too.

      • Yes we desperately need a correction. But I fear that if prices collapse they will become irresistible to foreign nationals who will buy en masse and we will lose whatever is left of our sovereignty. And there is no doubt the current crop of politicians, both Libs and Labor, will sell us out without a second thought.

      • Won’t happen, the NLP will introduce a foreign owner grant at some stage to help sell off what’s left.

    • 38.2 or 49 % correction from Fibonacci…So far only 10 % in inner west Sydney, after 100% up in last 10 years…Up 100 %, down 50% to reset.
      So Labor wins, cancels negative gearing, reintroduces it a year later as prices fall and “renters don’t have anywhere to live now those kind landlords have sold (to owner occupiers…)” , and any other policy that might pump the balloon back up. First time investor grants anyone?

  2. So Scomo is still wielding his scalpel and Labor are now packing a magnum(They have upgraded from the sledgehammer)
    You know what they say about bringing a knife to a gun fight.

  3. Changing negative gearing to foster investment in new homes makes sense.

    I suggest that councils should change the land use classification for all parkland in central Melbourne and Sydney: Toorak, South Yarra, Camberwell, Malvern, Potts Point, Vaucluse etc and build good quality high density houses for new immigrants. That’s space for at least another 5 million people! Let’s face it, people in the suburbs that contain the 1% believe that public assets and amenity is theft and would be only too happy to see high density buildings add diversity to their over quiet suburbs.

    The fortune made by councils selling to developers would create a revenue steam the envy of the world that could be put into a first home buyers scheme. I just can’t see how anyone would object to such a plan? Imagine the diversity. It would be fantastic for the economy and liven up some of the boring, quiet places where roads and lanes are under-utilised as meeting places at night. We could allow owners of large blocks to sub-divide their land too in order to help deal with the global population overflow. In that way everyone could share the al fresco lifestyle and feel close to their community. We could move in a greater cross section of our community now marooned out in the outer suburbs to live some of the older places that have become too ‘white’ full of anglo saxon types. They’d be forever grateful as they’ve been missing out due to these silly heritage laws. Let’s get rid of those sort of discriminatory laws – they’re racist! The people there will just have to suck it up if they don’t like it.

    Let’s get Dr Liz Allen on the case – she’s a demographer and friend of developers. I’m sure she’ll have some good ideas about how to get this plan cracking.

    • Centennial Park is begging for infill by a few dozen well designed and vibrant high rise lifestyle complexes.

    • kiwikarynMEMBER

      High rises that are half immigrant occupied and half public housing. That should solve the class problem as well as the race thing.

    • terrrible trader

      I think Brisbane will do what it do I think the early to mid 2000’s where it took off when Sydney was falling.

    • Yes, to head that off at the pass (at least until the LNP finally freak and really wind back immigration) we need to

      1. Rezone large chunks of land for residential development and auction it off to home buyers.

      2. Favour private bank credit creation secured by land used for new housing

      Build baby build until residential tenancy rates hit 5%.

      • As the boomer landlord cohort retires the neg gear effect will be lost, but I reckon many don’t even get that and will wait too long and stuff their retirement plans

    • Not in the Brisbane where I live. Units are toast. Inner city might get you a bid. Everything else is treading water at best.

      • Well I usually don’t count units because you can’t live in them and own furniture at the same time.

      • yep, Steven that’s what I see up there.
        Sold a 2bed apartment in 2010 in Windsor (3.5km north of Bris CBD) for 396k
        Saw ones in the same apartment a couple of months ago (they are basically identical) going for less. Talk about bad investment.

        We bought a house in 2010 (moving from the apartment) 5km south east of Bris CBD. Cost us about 740k from memory. We probably overpaid but not by a huge margin. Sold it in Dec 2016 for $815k.

        All of the above were PPOR so investment wasn’t the goal but having lived across that city for 20 years and been active with property over that time, I see no reason why there would be a great price increase. If anything the huge supply of apartments, which was obvious when you looked at the skyline… there was no need to look at the data, this huge supply will push prices down.

  4. “..The Treasurer said the “softening” of the Sydney housing market over the past 12 months as a result of the Government’s “delicate” policy change was necessary to tackle affordability…”

    What is Scotty referring to?

    The Royal Commission into his banking mates has hardly been delicate and it appears to have been the key driver of increased lending standards and other restrictions on the more outrageously unproductive forms of private bank credit creation.

  5. You know that feeling you get when you’ve taken a ‘dead cert’ position in the markets, and suddenly, you realise you’ve got it wrong? Multiply that by a million, and that’s what’s headed towards our economies if/when the property market corrects.
    It’s easy to look on and say ‘they had it coming’ but that’s no consolation to the financial and social chaos that is going to be caused to many individual households ( perhaps some in our own families?) whose only sin was to ‘do as they were told’.
    Is it coming? Probably. But let’s not celebrate the fact – it’s going to be horrific when/if it does….

    • JunkyardMEMBER

      Yes It’s a dilemma I often struggle with. I’d like the whole housing edifice to burn down for my benefit and the long term benefit of the country. However it would harm many family and friends.

      The guilt passes quickly though. It needs to happen. It a market right. So for every loser there is a winner. Some now generation family members might go through pain but their kids will have less pain. We have to step back and look at the big picture. The long term view would be increased fairness and stability, and everybody gets value from that whether they realise it or not.

      Having said this I don’t think a massive housing crash is going to happen…. sadly…

      • ErmingtonPlumbing

        Once prices have crashed far enough for “your benefit” and you become a home owner yourself,….what are your hopes for Real estate price movements and affordability from then on,…mmmm?

      • JunkyardMEMBER

        EP I’m quite cognisant of human greed and selfishness. I’ll tell myself now that, should by some miracle I one day become a home owner, I’d be happy for shelter to remain stable and affordable forever.

        In reality though, if another bubble was blown after I purchase, I’d probably be too busy at relations parties or holding court at my stainless steel outdoor kitchen with custom woodfired pizza oven to GAF about those missing out.

      • ErmingtonPlumbing

        I applaud your honesty Sir

        You know Ive got a bit of equity,….bur not the income to justify one of them out door stainless steel kitchens with wood fired pizza oven,…long sigh.

      • I agree with you all.

        Having spent years at dinners and BBq’s with the Smugglies gloating over how much their IP has gone up and detesting listening to them, I am going to have a little smug schadenfreude moment of my own when it all goes to hell.

        At the same time many of these people are simply ordinary mums and dads trying to get ahead and live the Aussie dream of owning property in the way that is traditional for this country.

        Its a conundrum of how to feel when it happens.

    • Those same dears who were happy to wield the sword will discover the sword has two edges

    • It’s a fair point Janet, but the carnage is already built in. The only question is on whom will it fall? Those who blindly “just did what they were told” or the innocents who came after?

    • “Is it coming? Probably. But let’s not celebrate the fact”

      Why not? I and many others have been treated like scum renters for decades. Kicked around and abused by slumlords who are pure evil. Only to have them wave their self entitled sucess in my face, that turned out to be just irresponsible borrowing at our expense. I will dance dance dance on their financial graves for the hell they have put us through. Now due to good life fortune I have a fortune and will patiently be waiting on the sidelines to scoop up their losses and profit from their misery. Payback is a bitch.

      • Al
        I can only agree with you re the treatment of tenants. My beef would be particularly with the RE agents. I rented for a few years and I had to be the best tenant that could possibly be imagined – as you say – just treated like a piece of dog s..t on a boot by the agents.
        OTH my son had a house that he was renting while overseas. The tenant had the dog inside and when we went in there was dog s..t through the house – not even attempt to clean up.

    • I’m with Janet here. By the time this is over the Aus you now know may not exist. You are talking possible social chaos from which we, as a people, may never recover.

      • But for those who sat out the frenzy (by choice or by accident of birth) that Australia has already gone. The “land of the fair go” which used to be at least a non-laughable objective for a significant proportion of the population a mere 30 years ago has been replaced by an unrecognisable “I’ve got mine, Jack” bun fight. Zero vision. Culture/vibrancy has to be imported because, god knows, we’re far too lazy to develop our own. What we have now is just the cashed up version of the vacuum that will follow. The damage has been done. Very sad, but sad already. There’s no hope without a root and branch reevaluation that can only come with a blow up.

      • Flawse,
        I’ve seen 40% nominal and 55% real price decline within six years period. In the beginning, there were some tears, but in the end, it was a beautiful outcome. Houses become homes again and no one talks about that anymore. Society has been restored and bubble years are forgotten. Tools are placed in the system that same mistakes can’t happen again (LTI three times ).
        BTW I am moving back there.

      • karloo
        Where and when? Circumstances and outcomes are not equal.
        Note I have written about this for a long long time and see no alternative. It dates back 60 years not the 30 years some say here. The other thing I’ve written is that if you want this thing dead you have to kill it. A bit of a temporary demise from negative gearing changes is not going to do it. I’ve seen it all before several times.
        Cheers

      • mikef179MEMBER

        “I’m with Janet here. By the time this is over the Aus you now know may not exist. You are talking possible social chaos from which we, as a people, may never recover.”

        The Oz we know now will cease to exist but the country will recover. It may take a few years but the country will be economically healthier once the massive distortions have been removed from the system. In fact, the only way for the country to recover and move to a sustainable path is to get the massive distortions out of the system. And since Australia doesn’t want to do that voluntarily it will be forced on them.

      • Mike
        I agree with you entirely. However there is no easy path and I believe Aus will not be prepared to follow the necessary path. To do so would require massive redistributions of income and wealth that those holding the power (social, economic, political, financial) will not be prepared to do the necessary.
        It’s just a mess and I’m thinking moe Venezuela than a new wondrous paradise. We’ll see.

    • There is a lot of schadenfreude on this website and I can understand why. But I think that most Western Countries are based on housing or debt if they aren’t net exporters. Most people will be “losers” more so than “winners” because we are a CAD country. In the short term (a decade or more) most would lose out because even if you don’t have a house your business/job is somehow financed by someone else’s. I still think a slow hard-slog recovery is better as a whole for Australia than a hard crash.

    • mikef179MEMBER

      “It’s easy to look on and say ‘they had it coming’ but that’s no consolation to the financial and social chaos that is going to be caused to many individual households ( perhaps some in our own families?) whose only sin was to ‘do as they were told’.”

      I’m reminded of the phrase my parents often told me about putting my hand in the oven just because everyone else did. Sorry, I don’t think I’m going to be able to summon much sympathy for these people. They chose not to think for themselves and blindly charge into what was obviously an unsustainable situation. Whether it was through greed or simply not wanting to be seen as a renter people chose to turn off their brains and follow the crowd like lemmings. Especially when there was the whole situation in the US and Europe in the 2000’s as an object example. The younger ones who got sucked in will have time to recover. The older ones should have known better.

  6. PrinceOfPersia

    Labour will NOT win the next election, perhaps the one after that! They have no leadership, just a guy who speaks so much crap! Malcolm Turnbull is an intelligent and wise individual who knows how to play the game. It will be close, but the coalition will win again. You can put your houses on it. 🙂

      • ErmingtonPlumbing

        I think the response our little Iranian fellow was looking for Reusa, was,…”we all ARE putting our houses on it”

      • Even if the Labor Party wins the HoR it will not have control of the Senate even with the Greens. The Labor Party will only get things through the Senate with at least the Greens and Xenophon’s cohorts but I can’t see the Xenophons being keen on a lot of Shorten’s policies.

    • He spent 2 mill of his own money to win the last election. He couldn’t win it on his own merits. How intelligent and wise is that. The Libs are as bad as Labs , both couldn’t give a shite about australian people.
      Make your next vote count.✊

      • T, Tell it like it is 🙂
        Its interesting that with the increasing amount of informal votes, that robs the majors of essential public funding money

      • So they become even more dependant on corporate donations?
        Sounds like a great recipe for increasing the representation of ordinary Australians over corporate interests.

      • ErmingtonPlumbing

        A really large rank and file,…10x the current number could eaisly run out the coporate money that has so polluted and corrupted our major parties.
        Active participation and oversight from within the parties is our only chance of having someone worthy of voting for.
        https://www.alp.org.au/joinlabor

      • And He can still put another10 million in for the next election. No one will know for a year with the pathetic donation reporting…10 million from Point Piper capital gains, thanks to foreign mansion buyers with laundered cash.

      • A political message from Lib and Lab to 3rd and 4th generation Australians:

        Shuddup and stop being whiny racists

    • Sorry prince of Persia. The way things are going the ALP will win the next election handily.

  7. I think it would crash the market. Negative Gearing is a religion in Oz. If they remove it not only increasing the cost of carry but the whole mythology is gone.

    It makes up a essential part of the property holy trinity. Negative gearing – Capital Gains reductions- Property always goes up-

    That said I am all for it.

    • Labor will never enact it. They’ll cave once in … just like Adern did.

      People need to realise that policy is dictated by the wealth in this country.

    • Labor isn’t getting rid of all negative gearing.

      “Labor will limit negative gearing to new housing from a yet-to-be-determined date after the next election. All investments made before this date will not be affected by this change and will be fully grandfathered.”

      Negative gearing is a good financial incentive for investors to provide new rental housing in combination with government public housing. Private investors should never have been allowed to buy established housing to negative gear.
      This Labor housing policy proposal is well overdue.

      • It’s a financial incentive that will be arbed out by developers – you know, the industry who is happy to build fire trap dog boxes in the sky and then go into liquidation in order to avoid warranty claims.

  8. For Bill Shorten or whoever is the Liberal leader if they want to win the next election.

    We need an Australian ‘Housing Audit’.

    The owner, the occupancy type, and then if rented – the real rent paid & verification of all occupants. Then ATO action to recover tens of billions stolen in falsified rent & Negative Gearing (NG) claims.

    ➡️That would moderate house prices, esp in low end established dwellings in Sydney & Melbourne & restore Australian established housing home ownership.

    It would recover at least $10-15 billion from foreign syndicates & onshore proxies in false claims of rental income.

    It would trigger legislation in full disclosure & non citizen migrant use of housing.
    It would reshape NG to only be for new residential housing, far less taxpayer cost & a more productive social outcome.

    Along the way, it will expose & pop the underlying nutrient of the Sydney / Melbourne housing & rent price bubble.

    Which has been the foreign money laundering, and migrant guest-worker housing racket. At least 450,000 ex Australian dwellings, the majority foreign owned are now occupied by 2.7 million TR/Tourist Visa illegals ‘renters’ in mass scale illegal cash in hand migrant subletting.

    -/-

    The combined negative gearing & CGT cost to Australian taxpayers is estimated at $11.7 billion (Grattan Institute)

    How much of this taxpayer subsidy goes to foreign criminal syndicates and their onshore migrant PR (& previously TR proxies) in money laundering & running their $25 billion onshore cash in hand migrant housing subletting racket ?

    Almost a third of it. $3.85 billion.

    $3.85 billion gifted from Australian taxpayers to directly assist foreign & migrant proxies literally wipe out the bottom layer of Australian established modest / first home buyer dwellings – and convert them into migrant only slums.

    1.27 million ‘landlords’ claim negative gearing. (Grayson etc). The average is 1.3 properties overall – 1.7 million rented properties.
    56,000 are explicit foreign investors, often with multiple properties.
    243,000 are non citizens (PR & previously TR) who claim negative gearing, usually a proxy Chinese or other country citizen.
    299,000 x 1.3 dwelling acreage is 371,000 ‘foreign or non Australian citizen owned’ negatively geared properties

    A couple of things stand out.
    a) The vast majority of these dwellings are modest old low cost established dwellings now rented out as ‘private shared accommodation’ in locations that are predominantly migrant only zones.
    So NG isn’t creating any new housing but subsidising the conversion of existing Australian owner occupied housing into foreign owned migrant only housing.

    B) A high number of these NG non citizen PR & previously TR claimants have low income. Not just Aussie mums & dads or police & teachers at all. In fact 280,000 have no matched occupation category.
    In this we see Chinese PR ‘students’ with no income but 8 properties worth $3 million. A Chinese mum PR day care worker with 7 dwellings worth $4.7 million.
    Where did that money come from ?
    Private loans or agents washing in foreign criminal syndicate black money or from the lucrative onshore migrant cash in hand subletting underground economy.

    C) The locations of the dwelling also gives it away. Who are the tenants in these dwelling locations? : invariably non Australian migrant TR & Tourist visitors.
    Whole buildings, city & whole suburbs, acquired by foreign investors or non Australian PR, then converted into high density/ illegal migrant guest-workers with endemic cash in hand subletting.

    ➡️The mechanics of foreign owned / proxy migrant guestworker subletting.

    🔹$750,000 old 2 bed walkup unit in Broadway – Australian young family – father, mother & young child pay $500 rent a week or 40% of the dad’s $1,250 average income – their maximum limit in a ‘normal occupancy usage (2.9 or 3 per dwelling ABS).
    ➡️ $26,000 a year & 3.4% gross yield.

    The same type of dwelling next door is bought by a foreign syndicate for $750,000 laundering in money via a proxy. Let by a migrant friendly ‘agent’ to a lead tenant, then sublet & occupied by 6 foreign students who pay $190 or only 20% of their legal & illegal averaged income of $49,000 (Deloittes) for a room share.
    That is $1,140 a week income, or $59,280 a year, but only $500 a week is declared ($26,000 a year) and then Negative Gearing claimed by the onshore or PR proxy – often living in, but not on the lease as the ‘Loss’. The other $640 a week is collected as cash no tax ($33,280 a year).
    ➡️$59,280 a year (8%) plus no tax. More than the double income, no tax paid, plus Negative Gearing claimed on the ‘loss’ on false rent declared.

    Sydney / Melbourne housing impact.

    We have 2.2 million Temporary Visa holders (July 2018). 80% unskilled & third world origin (incl 30% NZ SCV non NZ born). 93% rent in ‘private shared accommodation, 86% are in Sydney or Melbourne.

    So 1.75 million ‘rent’ in Sydney or Melbourne, occupying / 6 per dwelling some 291,000 dwellings. (ABS)
    Paying some $14.5 billion in rent, but only $8 billion declared. (Legal v illegal occupancy ratio).

    🔻440,000 illegally working Tourist Visitors (TVWI), 5% of the 8.8 million tourist arrivals work illegally. (the legal ones also chew up private rental accommodation, but putting that aside). 410,000 tourist illegals are in Sydney or Melbourne consuming 70,000 dwellings (6 per dwelling) Paying some $3.4 billion in rent of which only a fraction at best $1 billion could be declared -/- these are illegal workers with fake Id in visa breach, not on any lease.
    And another 55,000 overstayers- same.

    So in just Sydney & Melbourne – the PR, TR & TVWI consume at least 570,000 ex Australian modest dwellings as renters.
    Pay some $25 billion in rent, but only $15 billion declared as legal use, the rest is illegal usage & illegal occupants.

    $10 billion missing – $7 billion alone in the in the ubiquitous high density sublet cash in hand TR ‘foreign student’ or ‘sponsored guestworker’ or ‘tourist visitor’ room & bunk share’

    Australian Housing Audit.

    🔹All Temporary & Tourist Visa holders to declare their location, address, activities, sources of income, funds & their rent paid & to who. A non citizen migrant Identity & tracking system is long overdue.

    🔹Details matched to owner & leasing agent tenant occupancy details including visitors and rent paid.
    Then cross checked, unit by unit, building by building, house by house and suburb, with authorities having full powers to inspect, verify & track occupancy.

    🔹High profile ATO investigations in the recovery of undeclared rent income – tens of billions yearly, plus back payment, fines & jail for these criminals.

    Foreign syndicate & proxy acquisition of old modest established Australian property would stop overnight.

    Australian rents & house prices would normalise. Most of the foreign criminal syndicates will pull the pin, sell up & exit. Putting hundreds of thousands of modest old established Australian units & houses back into the market.

    Australian born owner occupiers of modest housing (under $600k) trapped into mortgage indebtedness & negative equity caused by the artificial housing value bubble of foreign money laundering & migrant cash in hand subletting racket should be compensated out of this ATO recovery. There isn’t many….

    At least 1.5 million of the 2.7 million migrant TR & TVWI would be found to be living illegally in breach of Australian housing fire & safety occupancy standards & colluding to defraud.

    And the identity & verification checks will show at least 1.5 million or more TR & TVW migrants of the 2.7 million onshore are in visa breach and have illegal sources of income. All should be exited.

    Political Value ?
    Priceless.
    The foreign criminal syndicates who are behind all this don’t vote.
    The TR & TVWI migrants living & working illegally don’t vote.
    Every Australian would vote for it.
    The PR migrants here, doing the right thing & desiring home ownership or lower rents would also vote for it.
    And it’s long overdue.
    Other countries monitor & track housing usage & money flows, and especially migrant guestworkers very intensively in their accommodation, activities & sources of income.
    (China – all foreigners report to the police station monthly & declare – where you live, rent paid, to who, funds, travel internally, sources of income, any work or other activities). We need to do the same.