Senior economists have slammed the federal government’s “exaggerated” claims that Labor’s policy to wind back negative gearing will cause the housing market to crash and rents to rise.
Treasurer Scott Morrison on Thursday said a report into negative gearing by economics firm BIS Shrapnel showed Labor’s plan to limit tax deductions to new homes only would cause a major fall in housing prices and force tens of thousands of Australians into rental stress.
BIS Shrapnel has so far not disclosed who its report was commissioned by, but the economic modelling behind its key findings has come under fire from a range of quarters.
Why house prices won’t slide
Consulting economist Saul Eslake, a former chief economist for ANZ Bank and Merrill Lynch, told The New Daily that Labor’s policy on negative gearing was unlikely to result in a fall in house prices.
Mr Eslake said that for house prices to fall significantly there would need to be a material number of forced sellers in the market, and there would also need to be substantial oversupply of housing in the market for an extended period.
“In my view Labor’s policy makes it unlikely that negatively geared owners of established properties would need to sell, because there would not be any grandfathering under the policy,” he said. “Any suggestions that it will result in a fall are way off the mark.”
Exaggerating the impacts
Under Labor’s plan, from July next year negative gearing would only be available on newly-constructed homes. The changes under a Shorten government would not affect tax arrangements for investment properties purchased before July 2017.
Matt Grudnoff, senior economist at The Australia Institute, said the government was not painting an accurate picture of Labor’s proposals.
“The Coalition is engaged in very large amounts of exaggeration on negative gearing, for political rather than economic reasons,” he said.
Mr Grudnoff said he believed there would be “almost no impact on house prices” if Labor’s negative gearing policies were adopted.
“In the longer term they would slow prices down, but that’s the objective of the policy. At the moment first homebuyers are finding it harder to get into the market, so a levelling off in prices would take the heat out of the market.”
Mr Grudnoff said that while negative gearing changes would see the number of rental properties decline over time, this would be offset by an increase in new owner-occupied properties.
“It would stimulate the new housing market by bringing on more properties. Rather than buying into existing properties investors will move to new properties.”
Meanwhile, senior economist Stephen Koukoulas of Market Economics, said that under Labor’s policy, “there could be a switch in demand for new dwellings from established ones.”
“But negative gearing is not the only reason why people invest in established dwellings,” he said.
“There would be a fall away, but house prices are determined by a whole range of factors, from population growth to employment growth, interest rates and other variables.
“It would dampen house prices but won’t lead to a fall. Any effect on house prices would be barely discernible.”
Supply crunch approaching: HIA
However, not all economists agree. Housing Industry Association senior economist Shane Garrett said any restrictions to negative gearing would reduce housing supply and push up rental prices.
“Housing as an investment class will become less attractive and depress new home building activity,” Mr Garrett said.
“It would be unfavourable for our industry. We need 185,000 new homes to be built per year, but we have only achieved that three or four times over the last 20 years.”
Mr Garrett pointed to the fall in building approvals in January, which he said the HIA expected would continue through 2016 and into 2017.
“We see a further reduction in both the detached housing and the multi-unit segments,” he said.
He attributed this to a slowing in population growth over the last 18 months, a tightening in credit conditions for investors, and the recent introduction of a $5000 foreign investment fee.