Implications of Labor's negative gearing stance... what might happen?

March 15, 2019

With a federal election expected to be called within the next 12 months, many are preparing for controversial reforms to negative gearing and the capital gains discount, and the risks of implementing these changes are already being felt. The proposal from Labor is very real and if the policy change was put in place, new investors would only be getting negative gearing on new (not established) properties, and any investors selling their properties would have their capital gains tax benefits halved. Whilst to some this seems like a ‘Hail Mary’ call, it’s not hard to see why this is a hot topic, especially when it has been a fundamental part of the basic tax system since income tax came to play early last century.  

 

The last time the government announced plans to restrict negative gearing in February 2016, the property market was very different. With prices in parts of the country having risen by as much as 20 per cent with no signs of slowing, the change to negative gearing was proposed in order to cool some heat from out of control prices. To say the property market has changed since then is a gross understatement, any amendment today would be likely to have very different and unintended consequences to an already struggling market. The property and construction sector are already feeling the pinch and any further changes that would negatively affect the housing market has potentially catastrophic affects.

 

Despite the view that the modern-day political system may hold a “the other side said this so we’re going to say that” mentality, why is Labor proposing these reforms? Some may believe the days are gone where politicians will truly barrack for a system that is believed to be the right thing for the market. But Labor’s stated intention is that they are trying to level the playing field, to make it easier for first homebuyers to compete with “greedy” property investors. They are also promoting improved housing affordability and strengthening of the budget. But… Labor’s proposed changes would both accelerate price falls already underway in major cities AND choke the supply of new homes via lower demand. And you can’t have both. Either policy change should reduce supply, encouraging an increase in prices, OR they introduce new supply, putting downward pressure on prices. So which one is it? Falling prices or falling supply?

 

The ATO statistics indicate that there are just over 2 million property investors, with approx. 60% negatively geared. That’s a large portion of the market that isn’t going to be super happy if policy changes. RiskWise used the example of a typical investor in the present market with a median income that might benefit from about $60,000 in negative gearing and capital gains tax incentives, compared with just $10,000 for an investor under the proposed rules. If you are a primary investor in the current market, lets assume the proposed changes take place. Yes, you will still enjoy the benefits under the current policy. But when the time comes to sell your property to another investor, those potential buyers will be thinking twice, given they will no longer be able to claim negative gearing against their wages and only receive 25 per cent capital gains tax discount. And there is only one thing that will mitigate lower financial benefits, and that is lower prices.

 

All this being said, it is hard to fathom that a major political party in one of the modern worlds most established nations doesn’t have its residents’ best interests at heart. It is important to remember that the proposed policy change is actually in the pipeline to help would-be homebuyers that have to some extent been squeezed out of the market by the mounting number of investors. Whilst they’re not the only reason for the decline in home ownership since over the last 25 years, the growing presence of investors has been a contributing factor to why the proportion of Australians who own their own homes is now at the lowest point since the mid 1950s.

 

Property investors play an essential role in providing housing choice for Australians and there is always going to be competition. And if the anticipated impacts of these policy changes actually occur, what happens to the one-third of households who rent if suddenly there are fewer investors and less supply for the rental market? The environment is significantly different now and with everything going on with APRA and the Royal Commission, it is important that the government considers the barriers already in play in the housing market.

 

Australia’s housing sector is worth $6.8 trillion and political parties need to work towards a way to improve (not impede) an already strained market. Yet whilst popularity for Labor’s stance has diminished, the changes to negative gearing and capital gains discounts remains firmly on their agenda. Yes, there are some arguments for the policy but there are some careful considerations that need to be taken into account before being enacted.

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