Labor’s negative gearing policy will not achieve its intended goals

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Labor’s negative gearing policy will not achieve its intended goals

Negative gearing policy

Labor has told us it wants to scrap negative gearing concessions on established real estate in order to ‘level the playing field for first home buyers competing with investors’ and in so doing, improve housing affordability.

It has also told us it aims to stimulate the construction industry and housing supply by retaining negative gearing on new real estate, hoping that investors will migrate from established real estate investment to new real estate investment.

The big question is: will removing the negative gearing concessions from established property actually achieve these goals?

 

Firstly, let’s deal with the affordability issue. What Labor does not understand is that to improve affordability, you need wages to rise and interest rates or house prices to fall. Currently interest rates are at record lows and wage growth looks to be lacklustre over the coming years.

So when Labor talks about improving ‘housing affordability’ what it is saying is that it wants house prices to fall, and that scrapping negative gearing concessions on established real estate will achieve this goal.

 

What is causing our affordability problems?

Labor does not understand our current affordability problems have nothing to do with negative gearing but everything to do with the following:

  • Increase in the money supply: Australia’s money supply has been rapidly expanding because of the mining boom, falling interest rates, the rise of dual income households and growing overseas investment in residential property.
  • Australia is now an international market: Australia’s major capital cities are no longer local markets; they are international markets. Our markets are highly desirable to foreigners, especially the Chinese, who have been major investors in our off-the-plan market in recent years. Further to this, Chinese nationals have been skirting the foreign ownership rules, buying real estate through relatives or friends, and in the process have become significant investors in the established real estate market.
  • Supply constraints: Governments are too slow to approve metro development projects, with some states being worse than others. This has constrained supply which has been a factor in driving up prices.
  • Poor regional development. Governments don’t focus enough on developing key regional areas which could be greater hubs for employment and education, dispersing demand more evenly. This is where the government could have the greatest impact on improving affordability and the quality of life for all Australians.

 

The effects of falling house prices

If you take property investors out of the established real estate market which is what Labor wants to happen, prices will fall in many pockets across Australia – hardest hit being the middle and outer rings of our capital cities.

If house prices fall, this will not only affect the value of established real estate but will impact the value of newly constructed real estate. A direct consequence of this is that development will stop because profit margins have been eroded and we will see the level of housing supply contract significantly.

And Labor’s proposal to create 25,000 new construction jobs per year will simply not materialize!

Also if house prices fall, stamp duty revenues will fall, capital gains revenues will fall, and as the construction industry contracts and unemployment rises, the general tax base across the population will fall.

Furthermore, falling property prices will erode confidence in the general economy given that a very sizeable 51 per cent of Australian’s wealth is tied up in residential real estate.

 

Improving affordability

Negative gearing is not causing our affordability problems. It has been around since 1936 and is deeply embedded in our tax system.

It has also been in place through every major real estate boom and corresponding bust for the last 80 years. So to suggest it has created the current boom is simply wrong.

Changing the negative gearing rules at the end of a boom (since 2009 Sydney and Melbourne real estate has increased in value by 92 per cent and 69 per cent respectively), at a time when the economy is fragile, is fraught with danger and could have a disastrous effect on the market.

In fact, it could be the catalyst for a serious downturn in the economy.

So how could governments make a useful contribution to improving affordability?

Apart from preventing foreign ownership of established residential real estate, government intervention in managing houses prices should be around the release of supply, the de-centralisation of major cities, and improvement of infrastructure to regional areas – making the daily commute to these areas much easier.

This would not only create more jobs but improve the long-term affordability of house prices.