How Labor’s big negative gearing gamble failed

IT was the biggest gamble of the election — a promise to make houses more affordable. But not everyone was buying it.

Renting not buying could be the reality for many younger Australians. Picture: Brendon Thorne

IT seems negative gearing will be with us for a long time.

The election just finished was one that differed from many elections past — there were real and large policy differences between the two sides. Probably the biggest issue was on property prices. Labor went all in for making housing more affordable.

It was a risky strategy — after all, cheaper houses for some people means less asset price growth for others.

Labor promised to change capital gains tax — cutting it in half from 50 per cent to 25 per cent. Its even more high-profile move was to eliminate negative gearing. It would be abolished on all but new homes.

The policy aimed to encourage building new homes. It would also reduce the advantage of property price speculation. The x-factor was whether it would sting homeowners.

Economists differed on the extent to which they thought house prices might fall. The most extreme claim predicted house price falls of up to 8 per cent in coming years.

Was that enough to convince Australians? It seemed so. While the Coalition may not have won a clear majority, Labor won a clear minority. Changes to negative gearing were not enough to get it over the line.

AGE GAP / RAGE GAP

That makes sense in a nation where the old voters outnumber the young — there are more voters 63 and over than under 30.

What does it mean for the future? It means tax breaks for people running their rental properties at a loss will continue. It means people who own investment properties will continue to get a tax discount when they sell.

The rate of first home purchase is at record lows and the continuation of negative gearing means that is not about to shoot back up. Younger people will continue to be encouraged into renting.

Negative gearing is supposed to make being a landlord more profitable, so that rents fall. It probably does help rents fall in one sense, but elevated house prices means rents have risen rapidly. Rents in the state capitals have hit a series of new records, with average rents in Sydney rising to over $600 a week on average according to the CoreLogic RP Rental Review in March 2016.

TRY AGAIN?

Couldn’t Labor try again with negative gearing next time? Well, it might. But lessons learned in elections are not soon forgotten.

More likely is that Labor will revert to a small target strategy. It released what it called “100 positive policies” in the lead up to this year’s ballot box bust-up. Next time it might do a lot less, and leave house prices well alone.

SO, NO CRASH?

If there is an upside to all this, it’s that the economic outlook looks rather more frightening now than when Labor announced its negative gearing policy back in February.

We could find plenty of reasons that the world looks worse. Britain has voted for Brexit, the US might elect Donald Trump, and Australia’s inflation rate is rather concerningly low.

All this is possibly reason enough to take the air out of Australia’s housing market. Having that intersect with a big policy change might have been too much. If things suddenly turn sour, we may be happy that negative gearing is still in place.

But if this election kills the chances of negative gearing reform for decades, then we may regret not axing it when we had the chance.