Housing policy is one of the most contentious issues in Parliament and is usually a topic that both sides of politics avoid. However, after the Labour's housing policy was announced - regarding its plans to limit negative gearing to new houses and halve capital gains discount tax from 50% to 25%, there were concerns regarding unintended consequences.
To begin: what is negative gearing?
If you have a property where the rental income is greater than the interest you owe, then your property is positively geared. Pat yourself on the back, your mortgage is paying itself off.
If the rental income is less than the interest you owe, then your property is negatively geared. Despite being at a net loss, the benefit of negative gearing is that the loss may be offset against your taxable income - so in effect, you pay less tax.
In the period of 2012-13, the average net loss is about $10,000. Hence, if your taxable income was $80,000, then you’ll in effect be paying $70,000 after the offset.
Want to know more about negative gearing? Refer to our previous segment on negative gearing, where we look into its harmful effects on our economy.
In the end of the day, why should I care?
Good question, but this is more relevant to the average Australian than you think.
Negative gearing is subsidising and encouraging affluent investors, which means that they will drive up house prices. This means it will become harder for younger people to enter the market.
CEO of Youth Action, Katie Acheson said negative gearing has really become a ‘tax rebate for investors’ and that younger Australians should be ‘jumping up and down...as it is a systemic inequality issue for young people.’
Impact of Labour’s housing policy
When the Labour party announced its proposal, they explained that their threefold purpose:
1) to level the playing field for lower and middle-class earners;
2) to address Australia’s housing shortage by stimulating developments; and
3) to strengthen the Commonwealth budget.
However, many believe that the policy will have unintended consequences. With the next federal election coming up on May 18, 2019, Riskwise Property Research and Wargent Advisory have co-authored a report analysing the impacts of the policy reforms.
1. Adverse impacts of Labour's Policy on fragile suburbs
Riskwise CEO Doron Peleg said that one significant impact is that such a blanket introduction of the reforms would result in weaker and fragile geographical areas (SA4s) becoming more adversely affected than others.
The report identifies the top 10 SA4s that would be hit hardest by the policy: Darwin, MacKay, inner-Perth and Townsville. The impact is equivalent to the RBA suddenly increasing interest rates by 1% to 1.5%.
Peleg states that whilst in the past, mining states Queensland and Western Australia have benefitted from the resources boom, the two-speed economy has reversed and these areas have no ‘backup’ to soften the blow.
2. Impact of Labour's Policy on Investors
There have been other suggestions that the reforms will also have an adverse impact on investors.
Due to negative gearing policy, investors will be shifting their attention to new developments in order to exploit the tax discounts. The issue here is that many of these new developments make bad investments.
Firstly, many of these are in poor locations such as within the CBD or the outer suburbs. Secondly, once investors purchase new properties, they lose resale value. This is because they are no longer 'new'. This is a significant issue because 50% of investors sell within the first 5 years.
3. Impact of Labour's Policy on Housing Affordability
So the most important question is this. Is Labour’s policy really effective in addressing its intended purpose of making housing more affordable?
One school of thought is that the policy does make housing affordable but not without unintended consequences as explained above. Reducing tax discounts would drive away investor competition away from established properties which would lower prices.
However, another school of thought is that the improvements in affordability is only short term. This is because ultimately, Australia has a housing shortage and the policy is not strong enough to completely address that issue. Hence the view prevails that the policy effects will be limited once a new equilibrium is reached.
So to finish, what are some things that the policy could improve on? Business Insider Australia has released a report giving some recommendations.
Firstly, it recommends constructing more owner occupier appropriate dwellings in middle ring suburbs. This is to ensure the proximity of concentrated housing around key public transport corridors and train lines.”
Secondly, it also talks about providing stamp-duty exemptions to first home buyers and downsizers. This is to help them enter the market.
Finally, it mentions removing surcharges and duties for non-resident buyers. This is because “non-resident investors have played a significant role in stimulating new dwelling supply through this cycle.” The surcharges have but slowed down these developments.