This week saw a major wave of attacks on the ALP proposed reforms to negative gearing and capital gains tax. One thing is certain this is just a taste of things to come. The Prime Minister Scott Morrison and those property speculators with an interest in the status quo will run the mother of all scare campaigns between now and the next Federal election. With the property market sagging by the day, it will not be difficult to spook the electorate that the ALP reforms might be another ‘straw’ on the property market’s back and therefore a risk to the economy. The ALP need to make a simple smart tweak to their proposed reforms right now…before the locusts and rent seekers spook the public.
Every day there seems to be another dubious study by some “interested” group claiming that the ALP reforms to negative gearing and capital gains tax will cause damage to the already weakening Australia housing market.
Macrobusiness has been kept busy dissecting the worst of them and calling out the shameless scare campaign being run on the back of them by the Prime Minister Scott Morrison and the Treasurer Josh Frydenberg.
- Property investor’s lobby launches laughable negative gearing attack
- Property locust swarm swept away by pure disinterest
- HIA: Falling house prices to damage affordability…say what?
- Master Builders swarms with negative gearing locusts
The power of a scare campaign about Australian property
It is important to remember that a scare campaign about Australian housing only needs a sniff of truth about it for it be very politically effective. Which of course why both sides of politics have been content to stand by and do nothing or actively applaud/assist, as the Reserve Bank of Australia, APRA and the Australian banking industry have blown, since the mid 1990s, the mother of all house price bubbles with a mountain of household debt.
So frenetic has this housing bubble blowing been that a wide range of other key policies have been distorted / mutated to help keep the bubble inflated and growing.
- Foreigners were allowed until recently to buy up existing Australian housing with relatively few limits.
- Temporary residents (of which there are hundreds of thousands in Australia) are still permitted to buy up existing property.
- Foreigners and temporary residents are allowed to buy up new housing stock with few restrictions.
- The rate of immigration was tripled by Prime Minister John Howard in the early 2000s and this has supported demand for housing and helped keep house prices and rents on an upward trajectory.
- The SQM residential vacancy rates in Sydney, Melbourne, Hobart, Adelaide, Canberra and Brisbane remain tight despite massive levels of housing construction.
Even though most Australians would like housing to be more affordable, they understand that, like it or not, the Australian economy now revolves around our housing bubble.
No matter how much they may dislike the status quo they take very seriously warnings that a change of policy might cause a meltdown (or a worse meltdown) of the property market.
So what is the ALP Negative Gearing / Capital Gains policy and how risky is it?
The ALP policy is explained here.
As reform policies go it is fairly mild and the key points are:
- Existing property investments are not affected by the changes.
- Negative gearing will be restricted to new housing construction only.
- The current discount on Capital Gains tax will be reduce from 50% to 25% for all investments
In principle the reforms have a key attraction. Investors in new property construction who are motivated by negative gearing will be able to continue to use that strategy. As the ability to use negative gearing will no longer be available for investment in existing property, in theory, the table has been tilted towards new housing construction.
More new housing should reduce the upward pressure on house prices and rents. In theory if house prices and rents are rising more slowly, they are slowly becoming more affordable without any nominal price fall. So in theory all those people who own houses will not feel as their ‘wealth’ is being punished by falling house prices.
Not surprisingly the attacks on the ALP policy revolve around:
- Whether it will actually encourage higher levels of new housing construction? i.e. Will the continued availability of negative gearing for new housing construction be enough to attract extra investment, especially if the capital gains tax discount is reduced from 50% to 25%?
- House price crash – Will the removal of negative gearing for investment in existing housing AND the reduction of the capital gains tax discount discourage so much speculative activity that house prices will fall significantly.
The unstated but implicit attack on the ALP policy is actually much simpler.
Those Australians who own their own home either outright or with a mortgage and by definition have been the beneficiaries of the bubble blowing policies of the RBA, APRA, the private banking industry and current tax policies (including negative gearing and the capital gains discount) will not be getting as wealthy as fast if the ALP reforms are implemented.
The reason this brutal reality is not admittedly openly by Mr Morrison is that arguing for shameless greed subsidised by unproductive and distorting economic policy is not a good look. One suspects that Mr Morrison is just busting to make this very point like some modern day Aussie Gordon Gecko.
“Greed is good when it involves bending national economic policy into a pretzel to pump up the prices of Australian housing”
For the time being Mr Morrison is making do with “dog whistles” to the property speculators in the form of parables about how property speculation is just a few mums and dads trying to get ahead.
So what should the ALP do?
The key vulnerability for the ALP is that the removal of the capital gains discount for investment in new housing construction may be enough to discourage investment in new housing. Even if the ability to use negative gearing is retained.
This is an argument that can be made, it has already been made and it has intuitive appeal as the ALP ARE changing the status quo in respect of investment in new housing.
Reducing a tax discount is effectively increasing a tax. At least that is how the folks out in the marginal electorates will see it.
It doesn’t matter how many studies are cranked out by sympathetic think tanks that ‘prove’ that demonstrate new investment will not be reduced… in theory… there is a real chance that enough members of the public will accept that there is a risk that the reduced capital gains discount for new housing investment will reduce the amount of investment in new housing.
Less new housing = less jobs = less income = less good times.
The solution is straightforward.
Retain the capital gains tax discount at 50% for new housing construction.
That way the table is even more heavily titled towards new housing construction investment. Not only is negative gearing still available but the capital gains tax discount remains unchanged.
Plus if the ALP are going to continue to support the Big Business Big Australia population ponzi scheme they need as much investment as possible pumped into new housing construction. Australia’s major cities are packed to the gills with cranes building new apartment blocks and they cannot keep up as it is.
We need even higher levels of new housing construction and solidly tilting the table in favour of investment in new housing construction is critical.
While some greedy folks might fear that lots of new construction may reduce their unearned speculative paper profits on their existing housing assets, they will find it very difficult to give voice to their concerns when it will be just an indirect result of a policy that is driving employment, construction and delivering new shelter to Australian families and workers.
What are they are going to argue? We need less investment in new housing?
What if this is too much stimulation of new construction?
Too much housing ? In Australia?
Australia has been chronically short of housing stock for decades. Residential tenancy vacancy rates have been tight (circa 2% or less) in most capital cities.
Forget what the shortage deniers claim. If there really are a bunch of empty bedrooms out there and the current owners of them don’t want to rent them and make money it is much easier to just build more than try to force those owners to put their spare bedrooms or houses onto the market.
If we find that we actually achieve healthy residential vacancy rates of 4% – 5% in our major capital cities and we are desperately worried about too much shelter for Australians (or for humanitarian arrivals or even immigrants) then the solution is simple. Just reduce the capital gains discount on investment in new housing – either to 25% or somewhere between 50% and 25%.
But let’s not lose too much sleep about the problems of an over abundance of affordable shelter for Australian families and workers. Perth has had residential vacancy rates of above 5% for about 5 years and house prices and rents have drifted down relatively slowly. If we actually achieve an abundance we should declare a national holiday.
It takes a large over abundance of housing to fix housing markets as sick and as distorted as those in Australia.
The ALP must tweak their current proposal so that with respect to investment in new housing there is NO change at all to the status quo.
Investors in new housing construction should:
- Continue to be able to use negative gearing
- Continue to receive a capital gains discount of 50% on their investments.
Why risk it?…….. when it comes to important and long overdue reforms to negative gearing and capital gains tax.
UPDATED : JULY 2019
The ALP policy proved to be too risky and contributed to their loss at the May 2019 election.
While the Glass Pyramid recommended approach was far less risky it is time for a turbo charged policy that is untouchable.
This new No CGT on New Housing policy can be adopted immediately and immediately deployed against ScoFry.
The ALP need to return to battle as fast as possible and what better way to do it.
Abolish CGT on New Housing.