Don’t worry if house prices fall, says Bowen

Chris Bowen tells homeowners not to worry if equity in their homes falls into negative territory.

Labor Treasury spokesman Chris Bowen in Perth yesterday. Picture: AAP

One of Australia’s most influential property industry leaders has delivered a sharp critique of Labor’s negative gearing tax shake-up, while Bill Shorten’s Treasury spokesman has told new homeowners they should not worry if the equity in their homes falls into negative territory.

As political debate over housing dominates the final week of the election campaign, newly elected Property Council of Australia president Stephen Conry said Labor’s promise to scrap negative gearing for existing properties from January 1 was “badly timed, given the nature of the residential market”.

“We should be encouraging investment, not discouraging it for the $7 trillion housing industry,” Mr Conry said.

The JLL chief executive, who took over as property council president last month, described the housing market as “fragile” following two years of a regulator-induced bank clampdown on lending.

“History is somewhat of a judge where changes made in the mid-1980s proved to be unsuccessful, and were therefore reversed,” he said.

Economists interviewed by The Australian said Labor’s $32.5 billion negative gearing clamp would result in the prices of houses and apartments falling. Real Estate Institute of Australia president Adrian Kelly said that, should the changes to negative gearing be introduced, existing properties would be “worth less because there’ll be less investment”.

Renters were also earmarked as the group most likely to suffer under Labor’s policy revamp.

Tim Reardon, chief economist of the Housing Industry Association, said: “I think if we’re looking for losers, the biggest losers out of this will be the renters. If you increase the costs on landlords those costs are transferred very quickly in rents.”

The concerns from leading industry figures came after Chris Bowen, in line to be treasurer in a Shorten government, said home buyers should not be deterred about investing in the residential market, despite the possibility of their asset slipping into negative equity in the short term.

Mr Bowen said they would “only lose money if you sell”.

“I mean sometimes lots of people go into negative equity when the housing market does fall,” Mr Bowen told ABC’s Triple J this week. “I remember when I first was in the housing market I went into negative equity for a while. You look at it carefully, but unless you actually sell, then you haven’t actually lost any money. The market does come back.”

Mr Kelly said it was an irresponsible comment from a potential treasurer, adding that real estate investment advice should be left to the experts. “While we don’t know what the market will do, first-home buyers are not experienced in real estate and should be extremely concerned about going into negative equity — it’s not normal for first-home buyers,” he said.

Labor has pledged to match Scott Morrison’s plan to act as guarantor to allow 10,000 first-home buyers to purchase homes with a 5 per cent deposit rather than 20 per cent.

Liberal MP Jason Falinski, chair of the parliamentary committee on tax and revenue, said it was “negligent” and “reckless” to talk down concerns of homeowners falling into negative equity. “It is completely reckless for a potential treasurer to be talking in these terms, not to mention borderline negligent to be saying it to a younger audience,” he said.

Mr Falinski rejected claims the government’s deposit policy could force home buyers into negative equity. “The thing that is likely to create that is the withdrawal of negative gearing from the housing market in Australia,” he said.

Mr Conry, who took over as Property Council president from Mirvac chief executive Susan Lloyd-Hurwitz last month, said the market would be distorted by Labor’s negative gearing plans because investors would rush into the market in the six months between when the policy is introduced and January 1 if Mr Shorten becomes prime minister. “With people getting into the market, you might see a bit of an (initial) upswing,” he said. “There will be those who are very nervous, and think, well, is it better to sell now? So there’ll be activity either way.”

He said government needed to deal with overall tax reform, which was difficult under three-year terms without bipartisan support.

Mr Conry said the housing market had already been burdened with the uncertainty of an election campaign.

Under Labor, only newly built properties could be negatively geared, though existing property investments would be grand­fathered, while the capital gains tax discount would be halved to 25 per cent.

Economic modelling released in March by SQM Research found that in a best-case scenario housing prices would drop by 4 to 8 per cent over a three-year period to 2022, assuming an interest rate cut of 50 basis points by early January next year, if the Labor policy were enacted. SQM predicted that property sales turnover would fall another 8 to 15 per cent by 2022 from 2019 levels with most of the declines in sales to occur in the 2020 calendar year. This would cause a flow-on effect to state and territory governments with an aggregate fall in state stamp duty revenue of $2.3 billion.

The researcher reasoned that nervous investors would leave the property market, sending prices falling further in most cities.

At the time, SQM Research managing director Louis Christopher said the windback of negative gearing was needed in the long term, but should be implemented slowly as part of wider property tax reform. “Such a tax change during a housing downturn is, in our opinion, a risky move for the economy and so we encourage discussion of perhaps a phase-in period for such legislation,” Mr Christopher said.

Additional reporting: Greg Brown