Election campaign on housing

Unintended consequences

The Grattan Institute has unsurprisingly been an enthusiastic supporter of Labor's proposals on negative gearing, but their modelling has never made much sense to me. 

In short, housing prices wouldn't fall materially under Grattan's model, perhaps 1 to 2 per cent, and rents wouldn't increase much either.

It's not really a model as such, rather it simply divides the assumed value of the tax benefits by the total value of the housing market, which isn't how marginal buying decisions are made, and also doesn't factor in the unintended consequences of such a policy change.                                              

Evidently negative gearing can't have inflated prices much if its removal doesn't see prices fall. 

Having worked on far more extensive modelling with Riskwise the one thing we can say with certainty is that under Labor's policy rental yields would have to rise.

Here's Danielle Wood from Grattan:

Source: SMH

What isn't mentioned here is that the ALP policy is actively designed to funnel negatively geared investors into new and off-the-plan apartments, which we already know to be bad investments.

Two-tier market

In fact, new apartments will be even worse investments under the ALP policy, because some developers will undoubtedly build low-grade apartments for marketing to investors for the tax benefits.

Meanwhile the second user of the property won't have access to the same tax benefits as the first, so the value of new units will plunge post-purchase. 

As Veronica Morgan pointed out this will sadly also see a rampant return of the white shoe brigade, flogging new apartments for developer commissions to unsuspecting young investors.

There will inevitably be some horrible losses for investors in new apartments to absorb. 

Loophole

The proposed changes are also arguably elitist given that the benefits for existing investors are grandfathered.

Meanwhile anyone with a family trust or investment income from other sources will be largely unaffected. 

If negative gearing is 'bad' or a 'problem' then surely phase it out or use a cap on benefits, instead of creating this ill-advised two-tier market. 

Capital gains tax is a bad tax which deters investment, plain and simple, and shouldn't be increased period. 

The ALP won't be backing down as the alleged $32 billion of Budget savings are funding the election pledges, so the only hope is that the Senate thinks carefully about the proposed policies before waving them through.