Are the scare tactics regarding Labor’s housing policy too much?

Labor’s policy certainly moves in the direction of reducing the appeal of tax breaks for future investors who purchase established properties. It does so by removing the ability for new investors to claim losses on their rental properties as an offset to their taxable income, known as “negative gearing”. It also halves the tax discount on any capital gain made during the time the property is owned.

Of course, investors who already own their properties are protected, or “grandfathered”, so that they get to keep the ability to negatively gear for as long as they continue to own the property and to enjoy the bigger capital gains tax discount when they decide to sell.

So, there is in fact little incentive in Labor’s policy for existing landlords to liquidate en masse the properties they already own. Quite the opposite – the incentive is to retain these grandfathered properties in their portfolio for as long as they can to keep the perks. The removal of these properties from the market could actually support home prices, as would any rush to purchase properties ahead of the deadline to secure the tax perks.

However, for new investors looking to purchase in the future, the removal of tax breaks does make purchasing established properties for investment purposes less attractive. It is entirely plausible that this would lead to a one-off revision in investors’ appetite to buy established properties, which may lead to a fall in established house prices, or, more likely, slower growth than otherwise.

John Daley at the Grattan Institute has estimated this would be in the order of tw0 per cent lower growth in one year than otherwise – house prices would grow five per cent in the year the policy were introduced, not seven per cent. Or, if house prices were going to be flat, there would be a two per cent fall. Overall house price movements would of course be determined by the relative forces of supply and demand in that year.

So, house prices may fall as a result of Labor’s proposed changes, but likely not by much.

And even if they did, is it sensible to expect to see rentals soaring at the same time?

A common belief might be that if investors lost their tax perks, they would be keener to positively gear their properties i.e. make sure their rental incomings exceed their mortgage payments.

Landlords can’t set rents on a “cost plus” basis. If they did, every time interest rates went up, rents would go up. They can only charge as much as the market can bear, determined by the relative forces of supply of rental properties and the demand for them. Labor’s policy could only increase rents if it resulted in increased demand for rental housing or decreased supply.

On the demand side, Labor’s policy, by cooling house prices, could be expected to reduce demand for rental housing by helping more renters, who were in fact frustrated buyers, exit the rental market.

Back to Eslake: “I don’t think it’s likely that existing landlords will rush to sell their properties, but even if they did who would by them? Not another investor, who would presumably also be looking to sell. It would be a frustrated home buyer from the rental market. So demand for rental properties would fall by an equal and opposite amount.”

Any landlord hoping to jack up rents in such a market would quickly find there were in fact fewer potential tenants for their property, thus frustrating their desire to raise rents.

The only way that rents could rise as a result of Labor’s policy would be if it somehow led to a reduction in the supply of new rental properties.

However, Labor’s policy quite deliberately keeps tax perks for investors who invest in new housing. If anything, it clearly skews investment towards new housing, rather than into established market.

Even so, the impact of Labor’s policy on the overall supply of rental properties would be muted. New buildings account for such a small proportion of the total housing stock, that the influence from year to year is only minor.

Young Australians worried any gain from house price falls would be eaten up by higher rents, should be rest assured.

Labor’s policy to curb tax breaks for property investment is the best policy for young Australians since Whitlam made university free.

In the cynical, modern era calculus of electioneering – which turns pre-election policy making into vote-buying exercises that invariably favour the demographic bulge of senior Australians – Labor’s policy is a complete oddity.

It is bold and courageous and is about the best thing we could conceive of to help share the great Aussie dream of homeownership with younger Australians.