How Labor’s plans to revamp negative gearing could put a floor on house prices and lower rents

Tue, 13 Nov 2018  |  

This article first appeared on the Business Insider web page at this link: https://www.businessinsider.com.au/labor-negative-gearing-impact-housing-comment-2018-11 

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How Labor’s plans to revamp negative gearing could put a floor on house prices and lower rents

The economic policy debate over Labor’s plans to overhaul the negative gearing rules is hotting up.

It is an important debate on a policy change that will have implications for the housing market, particularly for first home buyer and investor demand.

The government is claiming that the negative gearing change will “take a sledgehammer”, “smash” and “punish” everyone in Australia. Treasurer Josh Frydenberg says that under Labor, “your home will be worth less and renters will pay more.”

It is a frightening scenario for property obsessed Australians with the value of all dwellings in Australia estimated to be around $7 trillion.

But is it true? What are the facts about the current housing cycle and how will Labor’s plans to revamp negative gearing impact the housing market?

Let’s first look at what Labor is pledging to do.

In simple terms, the negative gearing reforms will mean that it will no longer be possible to invest and negatively gear an established dwelling. The policy will, however, be grandfathered which means that those 1.3 million Australians who currently have a negatively geared established dwelling will still be able to use the existing tax laws. Their tax and investment strategies will be untouched by the change.

The change will reduce demand from investors for established dwellings. This means that a source of frustration for young and first home buyers of having to compete with investors at house auctions, for example, will all but disappear.
Whether this leads to lower house prices is by no means clear.

To be sure, in isolation there will be downward pressure on prices as investors stay away from the market, but this will be offset, by an unknown amount, from the substantial pent up demand from those who have been frozen out of homeownership over many years.

With home ownership rates having fallen for the past two decades, the pent up demand for housing could be substantial, especially in the current low interest rate environment.

Rental impacts

It is important to note that in the past year where house prices have been falling as investor demand has fallen due to regulatory changes, the number of first home buyers has been increasing. Under Labor’s proposal, negative gearing will still be available for investors who buy new dwellings.

As investors inevitably take advantage of what will still be very generous tax and negative gearing rules, this switch in demand away from established dwellings is likely to underpin a lift in dwelling construction.

Another impact as first home buyers re-emerge and home ownership rates increase will be to see rents fall, not rise as Mr Frydenberg claims. The new buyers who by definition are renting now, will leave their rental premises and the supply of rental properties on the market will rise.

Basic economics tells us that rents will weaken in these circumstances. The effect of this interplay of changes in the housing market will take some years to work through the economy, but it is by no means clear or certain whether house prices will rise or fall as the changes in negative gearing rules come into play.

Various unknowns

It is interesting to note that under the current tax rules where negative gearing for established dwelling is available, house prices have been falling.

From peak levels, house prices have dropped 23 per cent in Darwin, 14 per cent in Perth, 8 per cent in Sydney and 5 per cent in Melbourne. Nationwide house prices have fallen more than 5 per cent.

This suggests that other factors are and will impact house prices, including a mix of macroeconomic conditions, unemployment, supply, demand, ease of access to credit, wages and interest rates. This is relevant because when Labor’s negative gearing rules take effect, these influences probably will be different to where they are now. Wages growth could be strong which would help to support demand for housing, regardless of the negative gearing rules.

If the RBA is right, interest rates could be higher, which would clearly add a cyclical downside to the housing market.

It is also possible, and perhaps likely, that the addition to the supply of housing will slow in line with the current slump on new building approvals which will be a factor supporting prices.

There are myriad issues, events, and factors that could swamp any effect of Labor’s changes to negative gearing.

To run a scare campaign that the change to negative gearing take a sledgehammer to the housing market is misguided and is not underpinned by any facts on the issues that drive housing markets.

 

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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Thu, 06 Dec 2018

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/dont-fall-spin-scott-morrisons-budget-surplus-no-certainty-224422761.html 

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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Prime Minister Scott Morrison could yet be guilty of prematurely declaring that his government will deliver a budget surplus in 2018-19.

Sure, tax revenue is growing at a rapid pace and the government is underspending on a range of government services, but there are still seven long months to go between now and the end of the financial year that might yet blow up the surplus commitment.

PM Morrison’s ‘return to surplus’ boast is based, it appears, on hard data for the first four months of the 2018-19 financial year on revenue and spending information from the Department of Finance. These numbers do look strong, at least in terms of the budget numbers and if the trends on revenue and spending continue, the budget will probably be in surplus. Treasury will be factoring in ongoing economic growth, no increase in the unemployment rate and buoyant iron ore and coal prices over the remainder of the financial year. These forecasts and hence the budget bottom line are subject to a good deal of uncertainty, as they are every year.

If, as is distinctly possible, the economy stalls in the March and June quarters 2019, commodity prices continue to weaken and if there are some unexpected increases in government spending, the current erroneous forecasts for revenue and spending could leave the budget in deficit.

Change of view on monetary policy

Wed, 05 Dec 2018

In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates.

For some time, I have been expecting the RBA to cut the official cash rate to 1.0 per cent, a forecast that has been wrong (clearly) given its decision to leave rates steady right through 2018.

That said, it has been a highly profitable call with the market pricing interest rate hikes when the call was made which has yielded a decent return as time has passed.

My updated profile for RBA rates is:

May 2019 – 25bp cut to 1.25%
August 2019 – 25bp cut to 1.00%
November 2019 – 25bp cut to 0.75%

The risk is for rates to 0.5% in very late 2019 or in 2020

It will be driven by:

  • Underlying inflation remaining below 2%
  • GDP growth around 0.25 to 0.5% per quarter in 2019
  • Annual wages growth stuck at 2.5% or less
  • Global growth slowing towards 3%
  • Labour market under-utilisation around 13 to 13.5%

There are likely to be other influences, but these are the main ones.

AUD, as a result, looks set to drop to 0.6000 – 0.6500 range.