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Negative gearing: Shorten won’t budge

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The AFR confirmed what ex-Communications Minister (under the former Labor Rudd-Gillard-Rudd Governments), Stephen Conroy, told me during the week: Labor will not backdown or water down their negative gearing policy that they’ll take to the election.

Even when I said: “What if house prices are falling rapidly, would they delay it?” And he said “No”. And even when I compared it to Labor’s ill-timed mining tax, when the mining boom was de-booming, he just said all the negativity about the negative gearing changes is just ‘vested interest’ hype.

And while I think Labor has a much more unified and professional-behaving team, who really look like they want to win, they have an aspect to the way they play the game that worries me — they aren’t flexible!

This morning’s AFR tells it this way: “Bill Shorten has stuck fast to his plans to curb negative gearing if elected, likening the effects of the change to turning down the flame under a boiling pot.”

Of course, the Government is now waking up that this is a key policy battleground and Bill is giving Scott Morrison a chance by not being flexible on this big change. The PM says it could KO our AAA credit rating but that’s debateable. But given his position in the polls, it’s worth arguing that.

Bill’s defence is that if you have negatively geared properties, you can keep doing it — that’s called grandfathering — and that’s fair. But when you come to sell your investment property, the policy will have two negative effects that all voters should understand.

First, when you come to sell your grandfathered property, it’s likely that less buyers will show up because property investors won’t be able to get the loans to buy the property because there’ll be no negative gearing on existing properties.

Labor is letting us have negative gearing on new properties. OK, we get that. But when you come to sell that property, it will then be an existing property and therefore future sales won’t attract future landlords and, therefore, the likely price will be lower.

We know that the price should be lower because that’s why the policy is being introduced. As Bill said, he’s “turning down the flame under a boiling pot.”

So in logical terms, this policy is good for homebuyers but less so for home-sellers.

And according to the AFR, once the changes came in, “all new negative gearing would be confined to new properties and other assets, such as share purchases.”

Bill has been in Perth and that’s where he came up with the line: “Property values in Perth have gone down about 13 per cent while the federal Liberals have been in, but apparently when you're a Liberal federal government, these are good property price falls,” he said.

It makes for great politics, Bill, but it’s not great economics. Remember Perth’s property price fall was linked to the end of the mining boom and this reminds us of that poorly-timed mining tax. That was a case of Labor being inflexible. And it’s a part of their game that they become mature enough to change in power.

The great Labor Governments under Hawke and Keating were not excessively left, they listened to business and Keating had the guts to change policies that looked like good ideas but were not working. His backdown on killing negative gearing was a case in point. He also championed a retail sales tax but later railed against a GST.

What I find interesting is that people like Stephen Conroy are telling me that “all credible economists says it won’t have much effect on house prices” and I do know a number of good economists who do say that. However, even though they are good and I always respect their economic figuring, they have made mistakes.

All economic modelling is based on assumptions and they will always determine your conclusions. I really don’t know how we can work out the number of landlords who stop buying investment properties, when the laws come in.

I guess a lot of people will find out how important property investing bidders are at auctions and open house sales but one trend is worth making you think about. Over the last two years, APRA made banks freeze out investors and foreign home loan applicants because they were worried, like the RBA, that house prices were rising too fast. And guess what has happened since then?

Yep, house prices started to fall. If Bill takes away the incentive for property investors to buy, the price drop might be bigger than many expect. If that happens, I’d like to think our PM would be flexible enough to respond to ensure that the property price doomsday merchants end up being right!

One final point. The AFR said the Tax Institute’s Bob Deutsch explained that Labor's changes to negative gearing would apply to all investments, not just property.

“This means that individual taxpayers would need to look at the totality of their investments,” Professor Deutsch said. “For example, if the total of the interest and deductions related to investments exceed the investment income, the excess will not be able to be used for offset against other non-investment income.

“This excess will need to be carried forward for offset against future investment income or capital gains.” (AFR)

Originally, Labor said losses from property and shares could still be used to offset tax liabilities, so this is another huge change that will worry the investing community.

That’s gonna surprise a few investors out there.

 

 

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Published: Friday, November 09, 2018


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