It seems a requirement of modern political scare campaigns that they be not only breathless, but logically inconsistent. And so it is with the mounting fear campaign being waged against Labor’s policy to, if elected, reform the tax treatment of investment properties.Labor’s changes would, we hear, both accelerate price falls under way in Sydney and Melbourne AND also choke the supply of new homes. Come on, guys.
You can have one, but you can’t have both. Either the changes reduce supply, exerting upward pressure on prices. Or they increase new supply, pushing down prices.
Falling prices or falling supply, which is it to be?
Still, amid the Coalition’s descent into chaos and general rabble-rousing – startlingly reminiscent of the late days of the Rudd-Gillard-Rudd government – it is, indeed, time to cast a critical eye over Labor’s plans, first announced in February 2016.
To say the property market has changed since then is an understatement.
Back then, the market was still running hot, fuelled by unprecedented interest rate cuts and what we now learn to be rather lax lending criteria being applied by the big banks.
Concern centred on deteriorating housing affordability (how quickly that evaporates when prices turn, right?) prompting Bill Shorten to announce a two-pronged policy designed to take some heat out of the speculative investment fire.
If elected, a Labor government would, from a certain date, abolish negative gearing on established properties – preserving it for investments in new housing to encourage supply – while also halving the capital gains tax concession for property investors from 50 per cent to 25 per cent.
Critically, Labor decided that it would ‘grandfather’ the owners of all existing investment properties, allowing them to both keep claiming any net rental losses at tax time, and also receive the full 50 per cent capital gains concession when they eventually sold.
Labor’s policy remains unchanged.
So, the 2.1 million individuals who declare rental income to the Tax Office, on the latest figures, continue to be largely unaffected by Labor’s changes.
If anything, they’ll have a new incentive not to sell their properties, which would be broadly supportive of property prices.
Still, the policy – aimed at helping first homebuyers – should, over time, ease upward pressure on home prices, by lessening the attractiveness of property as an investment.
Of course, the forces driving Australia’s property market are mind-bogglingly complex, including population growth, state planning laws, developer levies and capital growth in alternative assets.
To date, no economic modeller has actually attempted to model the impact of Labor’s full policy, instead choosing to model part of it, or just a distorted version of it.
When Labor first announced its policy, economist Saul Eslake urged that the changes should be implemented quickly, if elected, to avoid a “Gaderean stampede” of investors rushing into the market to snap up tax-preferred properties, further inflating spiralling prices.
Eslake says that remains a risk, but less so, now that the market has turned.
Eslake also notes that, in reality, a desire to cool excessive speculative investment in property has been a unity ticket of Australian politics recently; Labor through its proposed tax changes and the Coalition – somewhat ironically, given its traditional free-market leanings – through its support for the banking regulator’s interventionist regulatory measures.
In 2014, with the support of the government, the Australian Prudential Regulation Authority started to introduce measures to curb excessive growth in investor lending, including a 10 per cent cap on annual growth in the value of lending to investors and new limits on ‘interest-only’ loans, which require no principal repayments.
Home prices are now falling thanks largely to APRA and also the banking royal commission, which is likely to permanently crimp bank’s ability to lend.
Even the most aggrieved of would-be first home buyers are not keen to see price falls escalate to a level that would affect consumer demand and threaten their jobs.
But, on all indications, the unwinding of recent excessive gains is still proceeding in an orderly fashion.
But sentiment is key.
With investors already sitting on the sidelines, a newly-elected Labor government would need to handle the introduction of its changes carefully.
A May federal election would afford Shorten enough time to be sworn in and announce the policies to be effective from July 1 next year.
The first option may be too abrupt. The second risks leaving open a lengthy period for investors to rush in to exploit the expiring concessions. And investor rush would support prices, but could be ultimately destabilising when the tide eventually turned and demand fell after the change.
Either way, it would be wise for an elected Labor government to consult with both APRA – to ensure policy changes are working together – and the Reserve Bank – to ensure policy changes would not undermine the central bank’s efforts to keep the economy on an even keel so it can normalise interest rates.
But, it’s also important not to overstate the impact of Labor’s proposed changes.
In the economists’ lingo, the ‘stock’ of existing investors isn’t affected, only the incoming ‘flow’ of new investors.
And the stock dwarfs the flow.
Every month, lenders write about $30 billion in new loans, of which $20 billion goes to owner -occupiers and $10 billion to investors. That’s compared to the outstanding stock of investor loans of $565 billion.
And remember that of the 2.1 million Aussies who declare rental income to the Tax Office, more than 800,000 are actually ‘positively geared’ – with rental income exceeding costs – mostly because interest costs have fallen so far in recent years.
As I’ve written previously, Labor’s policy remains a once in a generation reform aimed at fixing a broken housing tax system which pits young homeowners against investors.
Caution is needed, but there is little reason to fear a market meltdown from the changes.
If the scaremongerers are successful in sparking a panic, blame should fall squarely on their heads, not a reform which will could help Australia finally begin to cure its excessive addiction to property investment.
Jessica Irvine is a senior economics writer for Fairfax Media.