HIA: Falling house prices to damage affordability…say what?

By Leith van Onselen

The rent-seekers at the HIA have released paid modelling from economic consultants – the Centre for International Economics (CIE) – warning of housing Armageddon if Labor’s policy to halve the capital gains tax (CGT) discount is implemented:

“Increasing the tax on housing will result in less investment in housing, fewer houses being built and inevitably a worsening of the affordability challenge.

“We cannot tax our way out of the housing affordability problem. The solution is less tax on housing and less government distortions on the market, not more.

“According to modelling undertaken by the CIE, on behalf of the HIA, an increase in CGT would result in a $1bn reduction in revenue to state Governments, increase the cost of renting and exacerbate the housing affordability challenge,” stated Tim Reardon, HIA’s Principal Economist.

“The analysis shows that increasing CGT would generate a revenue gain for the Federal Government of $0.5bn a year which would be dwarfed by stamp duty tax losses to the states in excess of $1bn per year.

“The CIE also concludes that increasing the tax on rental homes may initially benefit ‘first home buyers’ but over time this gain will be lost as rental costs rise leading to higher home prices, that will once again force first home buyers out of the market,” added Mr Reardon.

Does the HIA read its press releases before they are sent out? Did they not recognise that it is completely contradictory?

On the one hand, the HIA claims that Labor’s CGT policy would result in “a worsening of the affordability challenge”. Then immediately afterwards they claim that “an increase in CGT would result in a $1bn reduction in revenue to state Governments” because prices would fall, thereby unambiguously improving housing affordability.

Nor does the claimed “increase [in] the cost of renting” make any sense, given Labor’s negative gearing policy would channel investment into new builds, thereby increasing supply and lowering rents. In fact, Stockland last month stated that Labor’s policy would “put a rocket under” home construction:

The Labor Party’s plan to limit negative gearing tax breaks to new housing would put a rocket under the business of residential developers because demand from investors would surge, Stockland chief executive Mark Steinert says…

“Our business will rip,” he said at the Property Council of Australia’s annual congress in Darwin.

“We’re all about new product. At the end of the day, half our buyers are first-time buyers, and 80 per cent of our buyers are owner-occupiers. If the investors are going to participate in the market like they have in the past, that means they’re all pointing at our product and other developers’ products”…

Contrary to the HIA’s propaganda, unwinding the CGT discount makes sense for a variety of reasons.

First, there are actually significant Budget savings to be made. The Parliamentary Budget Office has estimated that cutting the CGT discount to 40% would provide a four-year Budget saving of $2.3 billion, whereas cutting the discount to 25% [Labor’s policy] would save $5.7 billion over four years, and removing it altogether would save the Budget $10 billion. In a time of deep Budget deficits such savings are money for jam.

Sure, there would be some negative impact on state budgets, but given stamp duties are one of the most inefficient tax bases around, what better way to encourage reform and facilitate a shift towards land taxes than making stamp duties less attractive?

ScreenHunter_6774 Mar. 30 10.24

Second, Blind Freddy can see that investment in existing dwellings has literally exploded since negative gearing was reinstated in 1987, followed by the halving of CGT in 1999. By contrast, investment in new dwelling construction – which is the supply that the HIA bemoans is far too low – has been poor:

By all measures, negative gearing and the CGT discount have been epic failures in achieving the HIA’s goal of boosting new construction, despite their significant cost to the Budget.

Third, there would be minimal (if any) impact on rents from lowering the CGT discount, since more than 90% of investors buy existing dwellings, and therefore do not add materially to supply:

Finally, there is a clear inverse correlation between investor demand and first home buyer (FHB) demand:

Thus, any reduction in investor demand from cutting the CGT discount would unambiguously benefit FHBs, who would no longer be crowded-out.

In short, the HIA has resorted to paid propaganda rather than a considered analysis of the facts.

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