What happened last time we messed with housing?

NEGATIVE gearing is one of Australia’s biggest political battles, and the scare campaigns are here. We can learn from the past.

IT’S the battle of the scare campaigns at the moment and so far there’s no bigger battleground than housing affordability.

Both the Labor and Liberal parties have attacked each other’s claims including that house prices would be “smashed” and rents would go up because of Labor’s policy.

Labor hopes to make houses more affordable by restricting negative gearing tax concessions, which allow investors to deduct losses on their investment from their taxable income. If Labor wins government, it will restrict negative gearing to new properties.

A high-profile cheerleader against Labor’s changes is the founder of Aussie Home Loans, John Symonds, said getting rid of negative gearing was “very dangerous” and “stupid”, and could spell “Armageddon” for the housing industry.

He backed up the emotive comments with an interview on 2GB, saying he thought prices could fall “10 or 20 per cent overnight”.

But his scary prediction has been questioned after it emerged that Mr Symond told ABC’s Q&A program in 2013 that negative gearing should be changed as it favoured high income earners buying million-dollar properties.

“Negative gearing does need to be looked at in the tax system because I don’t think it’s fair at the moment,” he said at the time. “It leans very heavily to the high income earners and that needs to be brought into line.”

But Prime Minister Malcolm Turnbull has continued to back Mr Symond’s concerns.

“More than a quarter of a million households in WA that rent — every single one of them will pay higher rents if Labor wins government,” he said yesterday.

“What they’re proposing will drive up rents as it did in the ’80s.”

Labor’s shadow parliamentary treasury secretary and western Sydney MP Ed Husic described Mr Symond’s comments as “outrageous”.

“It’s a shame that Malcolm Turnbull and John Symond have teamed up to look after their interests, having done very well for themselves, when there are so many people in my part of Sydney, for example, who are trying to buy a first home but cannot,” Mr Husic told Fairfax.

So who’s right?

WHAT HAPPENED LAST TIME WE MESSED WITH NEGATIVE GEARING?

Negative gearing was effectively axed for future rental property investors between July 1985 and 1987.

During this time rents increased notably in Sydney and Perth.

But according to ABC Fact Check, this cannot be blamed solely on negative gearing because prices remained flat in Melbourne during this time and rents actually fell in Adelaide and Brisbane.

What made a difference in Sydney and Perth, was that there already was a shortage of rental properties in these cities at the time negative gearing was removed, so prices were already on the rise.

Other factors that contributed to higher rents overall was the share market boom of the mid-1980s that made investing in shares a good alternative to property investment.

Interest rates were also high (more than 15 per cent) and this made buying a property more expensive. In contrast interest rates today are at record lows.

But when asked to guarantee negative gearing wouldn’t push rents up last week, Labor leader Bill Shorten would only say: “I can guarantee that our measures will give a better chance than currently exists for first homebuyers to enter the housing market.”

LOCAL FACTORS AT PLAY

One thing the 1980s example shows, and what the major parties probably won’t be making clear in their sweeping statements about negative gearing, is that the change will likely hit some areas harder, while in others it will probably have little impact.

This is likely the reason why Mr Turnbull has chosen to highlight the issue in areas like South Australia and Western Australia, both states that can’t afford a housing slump, or higher rents, as they are already facing tough economic conditions following the end of the mining boom.

Local factors at play in housing market. Picture: Braden Fastier

THE BIG PROBLEM

Each party has a different approach to fixing housing affordability but politics seems to be a guiding factor.

Many have noted that Mr Turnbull seemed to change his tune on negative gearing after Labor launched its policy, with one expert even predicting this would be a smart political move.

“Labor will probably lose the election on the basis of what they are proposing,” Dr Economou told news.com.au in February, adding that Mr Turnbull would be better off dropping any reform of negative gearing and capital gains tax.

According to The Saturday Paper, it was told the Cabinet decision to retain negative gearing was a political — and not an economic — move.

BUT FIRST HOME BUYERS DO NEED HELP

Both sides of the debate have acknowledged first home buyers need help as they compete against investors for properties especially in cities like Sydney and Melbourne.

Mr Symond said first homebuyer grants from the past did not work.

“All that does is potentially inflate the prices the vendors get the benefit and the first homebuyer pays too much,” he told 2GB.

“You could incentivise first home buyers by ... taxing them less on their savings, the deposit they’re building up.”

Young people struggling to compete with investors at auctions.

Fairfax has reported that negative gearing was costing taxpayers about $310 each and Mr Symond acknowledged that negative gearing was too generous.

But he said any changes should be introduced slowly, and as part of a broader review of taxes.

“You might introduce a cap, that up to a certain amount you can claim,” he said.

Other options include restricting it to a certain number of properties.

The 2009 Henry tax review has also suggested that bringing in negative gearing reform gradually would limit any short-term impact on rental properties.

Labor proposes to abolish negative gearing on existing homes from July 1, 2017. It also wants to halve the capital gains tax discount from 50 per cent to 25 per cent.

Predictions vary on the impact of its policy, with estimates showing housing prices may fall anywhere between two per cent and six per cent, not quite as scary as the “10-20 per cent” Mr Symond is warning of.

IS THERE ANOTHER WAY?

The Henry tax review also pointed to other measures that could impact housing affordability, such as planning and zoning regulations, approvals processes and the allocation of infrastructure.

The Prime Minister has actually highlighted these points as part of his approach towards housing affordability. Unfortunately these are largely state matters so he is limited in what he can do.

Neither party is taking a wider approach towards the issue, instead focusing on small tweaks to negative gearing and capital gains tax, in the case of Labor, or union corruption and infrastructure investment, in the case of the Liberals.

“Neither the ABCC or negative gearing is the magic bullet,” construction economist Gerard De Valence of the University of Technology, Sydney told news.com.au recently. “They may help but they won’t solve the problem overnight.

Mr De Valence said the purpose of negative gearing should be reconsidered, in the same way the government had explored the aims of superannuation.