ALP sets cut-off date
The AFR reported this morning that the Labor Party plans to change negative gearing and capital gains tax (CGT) rules effective 1 January 2020.
This assumes that the ALP wins the election, and that it doesn't take different advice from Treasury, and that the changes are successfully pushed through the Senate, wherein Labor may not have a clear majority (so a small amount of crossbench support will likely be required).
There has been some hopeful talk about this stimulating construction.
I don't have a crystal ball any more than the next fellow, but I reckon in the short term it'll do precisely the opposite.
New supply now needs Australian resident buyers willing to buy new apartments, and developers confident enough and in a position to construct it, but historically and over the past 40 years at least the main driver of new supply has always been accelerating price growth.
After all, the market has known about these prospective changes for some time now and the number of attached dwelling approvals has fallen dramatically lower over the past six months, to be more than 50 per cent lower year-on-year.
This is in spite of very high levels of population growth into the three main capital cities.
CGT changes stymie investment
The negative gearing changes are one thing, but hiking the effective rate of capital gains tax is a poor idea, and an obvious disincentive for investment in the economy.
Without being too dramatic, if not a vote for a recession it's probably a vote for a slowdown in activity in the economy following on from the banking Royal Commission, which Labor also barracked hard for.
Some of the projected Budget 'savings' are to be directed back at a Build to Rent scheme, so this may be one offsetting factor, though such optimistic ideas often flop.
In the medium to longer term the policy might help to drive new construction, if it's around for long enough without being binned again.
There may be some other intended consequences, not least borrowers redirecting all of their borrowing capacity into the family home, pushing up the price of desirable and family-appropriate housing.
Granted, there are numerous other unknown factors, including whether a new Labor government might once again introduce a first home owners' grant or stamp duty relief as an offsetting stimulus to the demand side.
So many different tiers of uncertainty will almost certainly see construction rates drop, in my humble opinion.
Loopholes
Labor's proposals haven't been very well explained for the most part.
New investors from 1 January 2020 will still be able to use negative gearing for established properties whereby they have other investment income against which to offset net rental losses, so the new rules are mainly favourable to better off investors and detrimental to younger and first-time investors.
There will also be comparatively little impact on many wealthier investors, since they can use family trusts or other vehicles in which to invest without too much discernible impact.
Investors that bought property prior to the drop-dead date will still be able to claim pre-existing net rental losses against their salary, and for them the existing CGT rules are grandfathered, so the changes are arguably iniquitous from an intergenerational standpoint (i.e. disproportionately favourable for those of us old enough to have invested before all the changes).
After the drop-dead date, investors will be able to claim net rental losses against their salary for new property.
However, when they come to sell those rules won't apply to the second user of the property, so the new rules impact both the value of the new property both when it initially settles, and at the point of resale.
Labor could have introduced a cap or a phasing out approach, but instead this is a multi-tiered dog's breakfast of a policy, which solves one problem and creates a dozen new ones.
