Shorten: Negative gearing policy to stay, house prices to fall

By Leith van Onselen

Amid all the scaremongering from our Property Council Prime Minister, Scott Morrison, along with property industry vested interests, Bill Shorten is standing firm on Labor’s negative gearing and capital gains tax (CGT) policy, vowing to make homes more affordable. From The AFR:

Bill Shorten says Labor will forge ahead with curbing negative gearing and capital gains tax exemptions if it wins the election because housing is still unaffordable for most…

“A lot of first-home buyers can’t enter the market. Come with us to any auction on a Saturday. Plenty of people …are still priced out of the market,” he said.

“If you don’t think housing affordability is a problem, talk to a young couple or talk to people who rent.”

MB’s best guess is that Labor’s negative gearing and CGT reforms would lower dwelling prices by an additional 10% in Sydney and Melbourne, given their still historically high investor shares, but less elsewhere:

The reality is that if policy makers actually want affordable housing, this means that dwelling values must fall relative to income. This necessarily means falling prices.

We need (and may see) investor shares of mortgage finance to halve for a healthy real demand driven market. Negative gearing reform should go ahead to achieve it.

The biggest risk to Labor’s policy is not the Coalition’s or the property lobby’s scaremongering, which is expected, but rather that which might come from the RBA and Treasury, as they have shown with the banking royal commission:

The Reserve Bank of Australia and Treasury have privately cautioned the Morrison government that any regulatory response to the financial services Royal Commission must be careful to avoid putting the brakes on lending to home buyers and business.

These institutions are no longer managing the economy, but rather managing the bubble. Hence, expect them to throw Labor’s sensible negative gearing and CGT policy to the wolves in a bid to keep the bubble alive.

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Comments

  1. Shorten also contradicted himself yesterday:

    “I think the system is sprawling out of control,” Mr Shorten told Fairfax Media about the number of temporary foreign workers.

    “I think that there shouldn’t be a temporary labour worker from overseas a day longer than we can take to train one of our own. We are always going to have some guest labour from overseas but I think the pendulum has swung too far.”

    https://www.smh.com.au/politics/federal/fairfax-ipsos-poll-voters-split-on-immigration-and-morrison-government-trails-labor-45-55-20181014-p509jz.html

    Of course Aussies can be trained to work as IT men, accountants, electricians, and truck drivers! But if 457 visas are given out for $0 each, what do you think will happen?

    ScoMo says the only jobs that should be reserved for Aussies is seasonal fruit picking: https://startsat60.com/news/politics/farmer-backlash-scott-morrison-fruit-picking-welfare-plan

    Cognitive dissonance all around. Why not ban foreigners from driving trucks so that the jobs are given to Aussies instead.

    • Watch Labor backflip like mad when there is any sign of the housing market taking out the rest of the economy.

      I’ve said this before. Better to leave NG until after the carnage so as not to repeat the mistakes of Keating.

      • Yeah, absolutely, Calvin, this will be another “carbon tax” backflip in the last moment. Unfortunately for “UnbelieveBILL” Shorten also his last as leader of Labor…..HE HE HE HE HE

      • The housing price falls already in the market are partly labor’s fault anyway. With the current poll results its a done deal. I know I wouldn’t be considering investing given the political climate now; there’s too much risk. If the Liberals somehow got in housing might stabilize. Macroprudential is done; if this was the only headwind it might actually be a good time to buy soon after all the forced sales from refinancing/IO resets but there’s more risks on the horizon. Until labor show their hand I’m sure there’s investors taking a “wait and see” approach right now.

  2. DefinitelyNotTheHorribleScottMorrisonPM

    Abolishing negative gearing means less rental houses, pure and simple. With all the disappearing houses, young people will become HOMELESS. It will also hurt ordinary mums and dads with taxable incomes of less than 80k trying to get ahead. This means nurses and teachers. Also, no-one wants to see a sledge hammer taken to the value of their biggest investment. Did I miss anything?

    • You forgot to blame Bill Shorten and his NG promises for the ongoing decline in house prices under your watch.

    • “Did I miss anything?”

      Yep, logic.

      Fewer rental properties means more home owners (debt slaves). And if the buyers can’t afford the price because they can’t access enough debt then the prices will drop to a point where these ex-rentals can be bought.

      Our real problem is so much new housing, unsuitable and of garbage quality, bought by idiot get rich quick types (including Chinese nationals and wannabe property moguls). Makes for crap rental yield, huge body corporate fees, cladding remediation costs and it’s bloody difficult to sell a cookie cut piece of crap. Ergo, prices plunge until someone sees it makes sense to own it AND live in it

      • Jumping jack flash

        This,

        The whole thing is upside down and backwards, as most things are these days.

        Renting should be at a premium due to the reduced responsibility and increased agility that comes with renting.

        When you take on a huge mega-mortgage of half a million dollars, or go full-retard and go higher, not only are you on the hook for the next 30 years for constant employment and stable family life, it becomes very difficult to relocate at a moment’s notice, such as for the loss of a job, or career progression, (career change becomes almost impossible), separation, etc. You’ve got this whopping great house chained to your leg, screaming for money. Then there’s maintenance, council rates, risk, flood, fire, storms, insurance, stress, worry, [dodgy tenants], etc. You just don’t get that with renting.

        Yet mortgage payments are usually higher than rent would be for the same house. It makes no sense to me. No wonder the whole thing’s messed up.

    • That is just absolute garbage. That is simply not how the real world works. There is no housing shortage in Australia. We have a surplus of investors. That’s all. It is the investor surplus driven by a (the old) surplus of credit that’s been causing price increases. Prices of land (in particular) and inputs, including trades and labour will fall back to the sustainable levels before your fictional chicken little view comes into play.

      • Not necessarily.

        The interesting bit is Luci talking about unintended consequences.

        Does she mean the RBA did not expect that cheap credit to get sprayed at existing housing prices?

        Did they expect the ‘market’ to allocate it to productivity enhancing investments?

        Did they expect APRA to regulate credit allocation? This one seems unlikely considering the dismissive attitude of the RBA to credit regulation.

    • Yes. Glenn Stevens should have answered a few questions in front of RC why such significant lowering of interest rates with house prices out of control.

      • Glenn Stevens has a 4 million dollar mortgage somewhere for sure. No plans to lobby for lower property prices.

      • Yes, given that emergency cash rates here during the GFC were 3%.

        If there were any serious journalists left in the MSM they would be making a huge song and dance about this fact. Instead, the economy is growing at nearly 3%, the GFC is nearly 10yrs in the past, the economy is motoring along (allegedly) and we’re stuck seemingly permanently at 1.5%. All we hear is … crickets.

    • Well he’s probably getting buyers on the ground basically telling him they need a large discount and are totally unsure because of Labor’s tax changes. I think the looming threat of those more than the macroprudential changes is what’s discouraging investors from entering the market at the moment – it totally changes the game.

      Labor’s changes I think are already “somewhat” priced in. Which is good for them because they can claim later their policy didn’t really drop the market when in fact the polling + the announcement of the changes already did the work.

  3. Curious to hear your thinking behind the 10% fall figure… I don’t disagree. But don’t even know what a back of the envelope calculation might look like for this…

    • – 38.1 % fibonacci drop of the 80 % increase from the original base. or -56.1 % to actually get to affordable…

  4. Jumping jack flash

    “The Reserve Bank of Australia and Treasury have privately cautioned the Morrison government that any regulatory response to the financial services Royal Commission must be careful to avoid putting the brakes on lending to home buyers and business.”

    Good to see they’re not pretending any more. The economy is driven by debt attached to houses. Not much else. As the debt is created and attached, the house prices inflate, allowing more debt. This is the “growth”.

    Stop attaching debt to houses, or attach less, then you’re not going to get growth, and maybe get shrinkage.

    • Yup, so much of that Aussie ‘wealth’ is little more than a mirage. No wonder the powers that be are so keen to see that nothing hinders the credit creation machine.

  5. “These institutions are no longer managing the economy, but rather managing the bubble.”

    That’s because the bubble has become pretty much the entire economy. It’s a massive one-way bet by pretty much the entire country. Every single egg thrown into one big basket. All focus on property to the detriment of pretty much everything else. A mania on par with tulips a few centuries ago. It’s the sheer utter length of it that gets me though and makes me shake my head in disbelief. I never thought crazy could go on for so long.

    • In all honesty its the same to varying extents no matter where you go in the Western world. We’ve moved from gold being the safe asset (gold backed currency) to housing (via mortgage created money) hence all the financial instruments reliant on it for value. Whether its CDO’s, securitised mortgages, etc we rely on the fact that “people need shelter” as the basis of our money.

      The only difference between tulips and houses IMO is houses have some value and people need them. I can live without tulips. The problem is that value can go up as well as down.

      • I think there have been plenty of land bubbles in the days of gold backed currency. See Australia 1890’s for example. And many places in the world that don’t have a land bubble, despite having fiat currency.

        And, as has been said before, people really only run to safety at the end of a cycle. Prior to that people are willing to take on plenty of risk (and debt) to try and make lots of money.

        The major point, here, is that you can’t run an economy just building ever more expensive residential property. It’s a short term bet at best that always ends in disaster.

  6. – There is no need for Shorten to insist on a change of the negative gearing policies. Just let ScoMo fall on his own sword and Shorten will look much better.

  7. I think the 10% figure is a bit light. The marginal investor won’t buy new property because of the perceived discount on re-sale (new car used car story). The same investor can’t buy second hand property until the old pre NG ban returns are tax adjusted through lower entry prices and/or higher rents.
    That should mean that price falls of at least 20% are baked in. Of course some of this would already be in play given Shorten appears to be PM in waiting.

  8. The Wealth Navigator

    When will someone will wake up share investors. Shorten’s CGT changes will impact share investors more than property investors. Here are some numbers to show this. in 2014-15 individuals reported $38.7 billion in capital gains of which only $14.6 billion related to real estate. The other $24.1 billion related to shares / unit trusts and other investments. Once share ainvestors are woken up we may see a different take on Shorten’s policy and I expect some form of change in the policy