Why Labor's negative gearing policy might be bad for everyone: Part 1

Before I get started, my intent is not to begin a political bunfight in an election year – or offend the sizeable segment of readers who will likely vote Labor in the upcoming election.

For the record, I’m also not an advocate of negative gearing as a wealth-building strategy.

My purpose is to simply explore the likely effects of Labor’s stated policies that target investors.

These new policies are well-intentioned – however, they present some big risks to property investors, the wider property market and even to general economic confidence.

So it’s important to be aware of and prepared for these policies, or any potential watered-down ‘compromise’ versions.

Over the next few weeks leading into the election, I’ll be exploring the implications of Labor’s proposals on this blog.

Let’s begin at the top.

On 12 February 2016, Bill Shorten announced a new Labor policy targeting property investors (as well as hitting stock market investors).

The policy stands to:

1. Restrict negative gearing to newly constructed homes only, and;
2. Reduce the capital gains tax discount on investments (including shares) from 50 per cent to 25 per cent.

Here’s the long-form policy, taken from the ALP website:

Labor’s Proposal

“Labor will reform negative gearing and the capital gains tax discount to ensure that our tax system is fair, sustainable and targets jobs and growth.”

Negative gearing

“Labor will limit negative gearing to new housing from 1 July 2017. All investments made before this date will not be affected by this change and will be fully grandfathered.

“This will mean that taxpayers will continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing.

“From 1 July 2017 losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities. These losses can also continue to be carried forward to offset the final capital gain on the investment.”

Capital gains tax

“Labor will halve the capital gains discount for all assets purchased after 1 July 2017. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent.

“All investments made before this date will not be affected by this change and will be fully grandfathered.

“This policy change will also not affect investments made by superannuation funds. The CGT discount will not change for small business assets. This will ensure that no small businesses are worse off under these changes.

“Labor will consult with industry, relevant stakeholders and State governments on further design and implementation details ahead of the start date for both these proposals.”

The stated goals of this policy are to:

• Potentially generate billions of dollars in extra tax receipts for the Australian government over the next 10 years;
• Increase the supply of new housing;
• Improve housing affordability for young people and middle-income-earners;
• Increase employment in the construction industry by 25,000 jobs.

These sound like noble aims, but how well does the policy stack up to these goals?

In the next few blogs, I will examine the dangers and likely impact of introducing this policy, and the realism (or otherwise) of its state objectives, including:

• The short-term effects of Shorten’s gambit
• The post-July 2017 effect
• The ‘push’ effect on rents from landlords
• The ‘pull’ effect on rents from renters themselves
• Impact on established property values
• Brakes on the wider economy
• Will this policy actually benefit first home buyers?
• Will this fuel a construction industry boom?
• Why the extra tax revenue for the government may be a ‘pipe dream’

before issuing a ‘final verdict’ on Labor’s proposal.

Let’s start in this entry by looking at what would be likely to happen in the months leading up to the policy’s implementation:

The short-term effects of Shorten’s gambit:

If implemented, Bill Shorten’s new policy is likely to create a surge of investment ahead of July 2017 – as investors race to secure tax concessions before the policy takes effect.

This is because under Labor’s policy, any investment property purchased before July 2017 would still be entitled to claim full negative gearing benefits and the 50 per cent CGT discount into the future.

The effect of this demand in the lead-up to the implementation of the policy would be to increase prices and reduce affordability – while raising no new tax revenue (the exact OPPOSITE of what Labor wants to achieve).

Incidentally, this would also create an opportunity for investors who already hold property to ‘cash in’ on the feeding frenzy, by selling their properties at a premium in the lead-up to July 2017.

In the next entry we’ll begin analysing what is likely to happen to rents and property values after July 2017, attempt to assess whether Labor’s purported benefits are based in reality or are a mere fantasy, and question what hidden dangers may have been overlooked by Labor’s policy makers.