Labor pledges to limit negative gearing, but will it work?

by Julia Corderoy16 Feb 2016
Negative gearing on property investments will be limited to new housing from 1 July 2017 under a new proposition put forward by the Labor Government, but one real estate association says it will exacerbate affordability problems.

Speaking about budget reform, opposition leader Bill Shorten said the current negative gearing policy and capital gains discount does not boost housing supply and will cost the budget over $10 billion this year alone. 

But limiting negative gearing under Labor's plan, says Shorten, will create up to 25,000 new construction jobs, lead to the construction of thousands of new homes and boost economic growth. 

All current investments – and any made before 1 July 2017 – will not be affected by this change and will be fully grandfathered.

However, the Real Estate Institute of Australia (REIA) said Labor’s plan to limit negative gearing to newly constructed investment properties will not boost housing supply, and by extension, housing affordability.

“The policy is built on the popular perception of the declining amount of investor loans committed to new housing construction relative to the total value of housing finance for established properties,” president of REIA, Neville Sanders said.

“Independent research commissioned by the REIA shows that around 27% of all loans for the construction of new housing in 2014 were to investors and that this proportion has remained relatively constant over the last 30 years (refer to the graph below). The absolute amount of investor loans committed to the construction of new housing has increased by more than seven-fold since 1986.”

If anything, says Sanders, Labor’s policy may exacerbate the affordability problem.

“Supply is constrained by a number of longstanding challenges including regulatory and zoning constraints and cost structures including taxing of building. These factors are not addressed in Labor’s policy,” he said.

”As a consequence it is highly unlikely that there would be the supply response anticipated by Labor and instead many investors would exit the rental property market resulting in higher rents.

“The proposal fails the general principle of good taxation policy that it should not favour particular investment classes. Limiting negative gearing to new dwellings will only add a distortion that reduces investment in housing, erode housing affordability and put upward pressure on rents.”