Understand negative gearing and you’ll understand why reforms are not the answer

First National Real Estate’s national communications manager, Stewart Bunn has articulated the industry’s concerns about the economic impacts of the proposal to limit negative gearing and double capital gains tax.

One of the most extraordinary moments of the 2019 federal election campaign came early, when Bill Shorten claimed the industry’s negative gearing campaign was simply about real estate agents trying to achieve higher commissions. This gross oversimplification of the concerns articulated by the industry shone a spotlight on Labor’s sensitivity to criticism of one of its key election platforms, and its desperation to shift the focus away from its economic management credentials.

With shadow treasurer Chris Bowen on the back foot, after revelations Labor had miscalculated the anticipated savings to be made by restricting negative gearing, 100 paragraphs of housing tax policy were reduced to 10, literally overnight.

Negative gearing is a taxation principle that has existed in Australia since the 1930s and it’s not just available for property investments. Other asset classes such as share investments can also be negatively geared. That’s where the ‘top end of town’ truly comes into the picture and this is why Labor’s characterisation of negative gearing as something used by ‘greedy property investors buying their fifth or sixth property’ is so wilfully misleading – albeit an effective class warfare call to action.

As has been stated by the REIA’s campaign, 75% of Australian investors (2.2 million people) who are using negative gearing own just one investment property and earn less than $80,000 per annum. In reality, less than 1% of the population is negative gearing their 5th or 6th property, which means if Labor’s policy is meant to hit the top end of town, it misses terribly.

If the ALP’s policy is about the economics, not the philosophy, why then does it propose to grandfather existing negative gearing arrangements and create a two-tier property taxation system moving forward? Surely if it’s about the economics, the removal of all negative gearing entitlements would be the preference.

New analysis by the Property Investors Council of Australia has revealed that the typical Australian investor benefits from negative gearing initially, but will be taxed $167,000 over the 30-year life of their investment property. Their initial tax benefit in such a scenario is around $30,000.

The facts are that economic modelling overwhelmingly indicates that if Labor introduces its negative gearing and CGT policy during a housing downturn, house price falls will be exacerbated – leading to potentially another 15% being wiped off home values. The ‘wealth effect’ of falling prices and negative equity will wash through the economy with further impacts on employment. Investors will certainly look to other asset classes, reducing the supply of available rental properties, so rents will inevitably rise.

Private investment is the best way to supply public housing and First National Real Estate sees no policy ready to resolve the shortfall that inevitably lies ahead. As Peter Switzer said in an article yesterday, ‘Anyone who has seen the social abominations in public housing buildings in Sydney and Melbourne wouldn’t hold out much hope for public sector developers.’

At this stage in the REIA’s campaign, nearly 10 million Australians have been reached with the industry’s message to tenants, homeowners, landlords and buyers.

Without doubt, millions of Australians were unaware of the proposal to restrict negative gearing and to double capital gains tax before the election was called, or what the impacts of such a change could mean for the economy. The communication of the industry’s concerns could not have happened as effectively without the broad-based funding and participation of agents nationally, and this has better positioned the industry for consultation concerning the proposed policy should there be a change of government this Saturday.

Stewart Bunn
First National Real Estate
National Communications Manager. Stewart has helped the REIA campaign articulating the negative impact these reforms will have on our industry. 

This is part of a series of guest blogs from Queensland franchise leaders sharing their insights into what the proposed changes to negative gearing will mean for our real estate market. 

Read articles by Coronis MD Andrew Coronis here and from PRDNationwide MD Tony Brasier here

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