The REIA and Property Council have joined forces, claiming the Labor Party’s proposed changes to negative gearing and capital gains tax “will have negative impacts on mum-and-dad investors, home owners, renters, the construction industry, state governments and the economy,” in the words of REIA president Adrian Kelly.
They cite a “truck load” of reports that oppose the changes. Here’s why they are wrong:
1. Negative impacts on mum and dad investors
The proposed changes protect all current investors using negative gearing and capital gains tax by ‘grandfathering existing investments’, so any existing investors are protected. Negative gearing and CGT discounts will continue to be offered for investments in new supply, although the CGT discount will be halved.
All existing investors are protected from changes and the policy is careful to continue benefits to encourage new supply. Currently more than 90 per cent of investors invest in existing supply, so the current settings have done little to add to supply and certainly haven’t added affordable housing.
2. Economists oppose the changes
Most economists have identified that the current capital gains tax and negative gearing settings distort investment in housing and create barriers to first-home owners.
There might be a mini load’s worth, but all paid for by vested interests. All independent analysis, which is a truck load and includes the RBA, shows how it distorts investment, robs the budget of revenue and locks out first-home owners. It’s intergenerational theft by tax distortion.
3. Prices will plummet as investors sell
Treasury advice to the current government has stated that the tax policy changes proposed by the ALP would have little or only modest effects on house prices.
Any analysis needs to ask to whom houses would be sold if investors sell? The only possible conclusion is to owner-occupiers. This means more of our population in home ownership, which has massive latent demand. Current market corrections are occurring in Melbourne and Sydney precisely because these policies have pumped up demand and prices are now corrected via stricter regulatory controls on lending to investors.
It’s ridiculous of the industry to invoke house price falls when prices have been artificially inflated by investor demand for decades. A house price correction in Sydney and Melbourne is occurring with these policies in place now.
4. Rents will rise
The argument is based on a false and mythological analysis of rents when Paul Keating quarantined negative gearing. In fact, in most capitals, rents didn’t rise, which would be expected if there was a general effect from policy change, except to a degree in Sydney and Perth which was more to do with a shift of capital to share markets due to favourable conditions.
The industry would have us believe that investors will require more from renters because they can’t write down losses. However, if investors are selling to home owners, this will remove pressure from rental market demand, placing downward pressure on rents countering any pressure to raise rents to meet tax costs. Besides, all currently negatively geared properties will continue to be treated the same. Investments in new dwellings will also be eligible for negative gearing.
The REIA and Property Council want to have it every way. They have never accepted these settings inflate price, but argue their removal will collapse price. Negative gearing hasn’t kept rents lower, because they have risen much faster than inflation.
5. The economy will suffer
This is the long bow drawn to argue that changes to negative gearing and capital gains tax will negatively impact the economy by producing a downturn in the property industry.
Treasury advice shows there is very little impact on property prices and the tax changes will rebalance the opportunities for first-home owners while maintaining tax concessions for investment in new builds. As most current investment is in existing property, the settings haven’t been what’s driving supply.
Australia does poorly on housing supply despite some record-level years over the past three to five years. This is partly due to not keeping up with population growth, partly planning but largely the very high relative cost of housing in Australia – in part because of current tax settings. It also ignores the ALP commitment to build 250,000 new affordable houses over the next 10 years, which is a major boost to housing supply.
It ignores the recent announcement to offer a 15 per cent withholding tax rate for Build to Rent, which equalises the tax treatment of investors in commercial property. This will be a fillip to the industry.
The property industry needs to look at all the policies on offer, not the selective bias they have against specific policies.
6. Unemployment will rise
An even longer bow drawn, based on the false assumptions about the economy. The opposite could be argued. Removing negative gearing for investment in existing property while allowing it for new supply could boost the supply of new builds. Building 250,000 new affordable dwellings over 10 years is a major supply boost.
The concessions to Build to Rent are a major boost to the industry. There is a potential major upside to employment. The community sector alone will add thousands of new jobs to build and manage 250,000 properties.
The building industry is famous for arguing the multiplier effect of every dollar invested in housing, but have conveniently ignored it on this occasion by falsely criticising one policy and ignoring others.
Since 1999 when the Howard government changed the capital gains tax discount from an adjustment for inflation to a 50 per cent discount, investors have increasingly dominated our housing markets. CGT discounts have driven investment for speculative capital gain, supported by increasing revenue exposure to negative gearing. The reforms are essential to raise revenue, rebalance the housing market, and to afford to build more targeted affordable housing.
Adrian Pisarski is executive officer of housing access body National Shelter