Labor risks $12bn housing hit over ending negative gearing

Ending negative gearing for existing homes and slashing the capital gains discount would cost dearly, says new modelling.

Opposition Leader Bill Shorten in question time yesterday. Picture: Kym Smith

Labor’s $32 billion plan to end negative gearing for existing homes and slash the capital gains discount would lead to a fall in new housing construction of up to 42,000 dwellings over five years and 32,000 fewer jobs across the country, according to independent modelling of Bill Shorten’s key property policies.

Warning of a significant contraction in housing supply, which could further strain the major capitals Sydney and Melbourne struggling to cope with population growth, the modelling forecasts a downturn in housing supply equivalent to accommodating 100,000 people.

A report commissioned by Master Builders Australia, using similar modelling techniques to that of the former Labor government’s Henry tax review, has forecast a potential $12bn downturn in construction activity in the first five years of the policy’s implementation.

The report, based on independent peer-reviewed modelling conducted by Canberra-based ­Cadence Economics, suggests that with housing supply already contracting, Labor’s policy to limit negative gearing to new homes and cut the capital gains tax discount from 50 per cent to 25 per cent would “exacerbate” the current downturn in the construction cycle.

In NSW, it would deliver a $1.4bn hit to building activity in the first year, representing a 6 per cent contraction in the sector.

 

It claims that housing construction conditions have weakened considerably since Labor’s policy was released in February 2016 and the sector is now more vulnerable to shocks.

Opposition Treasury spokesman Chris Bowen has been briefed by MBA on the modelling, which is the first assessment testing the impact of Labor’s negative gearing and capital gains tax policies on construction jobs and housing supply rather than property prices and rents.

The modelling, using worst and best-case scenarios, shows construction would fall by between 10,000 and 42,000 dwellings in the first five years from implementation. This would lead to between 7500 and 32,000 fewer jobs.

The value of the contraction to the industry is estimated at between $2.8bn and $11.8bn.

The contraction in renovation activity would be between $50 million and $210m.

When Labor’s policy was devised more than two years ago, it was released against the backdrop of a heated property market.

MBA chief executive Denita Wawn said the sector was now in a dramatically worse position than when the policy was first released at the peak of housing approvals.

Australian Bureau of Statistics figures released in August this year show a 9.4 per cent fall in new dwelling approvals over the previous 12 months. That figure is ­expected to fall by 25 per cent over the period from the 2016 peak to 2020. The modelling tests the ­opposition’s claim that its policy would increase housing supply by 25,000 new dwellings. The report shows that the impact would have the opposite effect.

“The ALP policy is not likely to boost housing supply or jobs in the residential construction industry,” the report claims. “On the contrary, new housing construction activity, new housing supply and new jobs are all expected to be lower over the five years following the implementation of the policy.

“The modelling in this report shows that limiting negative gearing to new homes and reducing CGT discount to 25 per cent will reduce new supply at a time when the construction cycle has already turned.”

It forecasts up to 8000 fewer houses and 34,000 fewer apartments being built in just the first five years. Labor has yet to reveal when the policy will commence if it is elected. When the policy was developed, investors outnumbered owner-occupiers in new housing loans, a situation that was crowding out first-home buyers and pushing up prices.

That situation has now reversed, according to the Reserve Bank of Australia, which revealed last month that the number of loan-approved first-home buyers had hit its highest level since the end of the global financial crisis due to the credit squeeze on investor lending and the federal government’s crackdown on foreign property investors.

Ms Wawn told The Australian: “When this policy first came out there were two clear objectives … one was increasing new homes and addressing housing affordability and the other was increasing jobs in our sector.

“A lot of our members took that at face value and believed it was a good thing … we thought it was important for us to test that. Unfortunately, the modelling shows that it will fail both those objectives.”

The report admits the modelling does not take into ­account the grandfathering of investments made before the policy start date but claims this makes no difference to the modelling for future house starts.

Mr Bowen said: “This research does not model Labor’s reforms to negative gearing — the Master Builders admit themselves that they fail to account for the fact our policy fully grandfathers existing property investments, meaning any investment purchases before the start-date are protected,” he said. “The Master Builders research fails to model Labor’s housing affordability package which includes a revitalised COAG process to boost supply.

“Labor is not ‘ending negative gearing’ — it is reforming it to ensure it works best for the economy and jobs by retaining it for new properties only.”

Labor finance spokesman Jim Chalmers this month conceded the market was softening but said Labor’s policy was a long-term plan, not a short-term fix. Labor recently confirmed it had no ­intention of changing its housing policy, which it had claimed would return $32bn in taxes to the ­government, constituting almost a third of its election ­war chest.