Why Labor Should Change Its Tune On Negative Gearing

By Victor Kumar
When Labor announced its policy to restrict negative gearing, Sydney’s property market was soaring, and its median house price had hit $1 million.
Unfortunately, for Labor, much has changed since those heady days.
In fact, according to CoreLogic, by the end of 2018, Sydney dwellings values were back to where they were in August 2016 and Melbourne values were back to February 2017 levels.
The news is even worse for Perth and Darwin, where dwelling values are back to levels not seen since March 2009 and October 2007 respectively.
The savviest investors see opportunities where others see fear, but there is no denying that property prices in half of our capital cities are falling, which puts Labor in a tricky position.
Not only did Sydney and Melbourne post significant property price falls last year, restrictions on lending have resulted in the Australian economy starting to look a little shaky.
For example, according to the Australian Bureau of Statistics, building approvals are woeful and housing finance is not better – and this is a state of play when interest rates are low and so is unemployment.
Our economy should be chugging along quite nicely, but instead there is growing unease that the country’s financial situation is looking a bit average.
What’s at stake?
While there is some conjecture on whether the temporary abolishment of negative gearing caused rents to soar in the mid-1980s, one thing that’s not in question is that tinkering with the property market in any way usually doesn’t end well.
Just consider how the economy is going at present, four years after the government regulator decided to tighten the lending screws nationwide.
An interesting anecdote from the last time a government fiddled with negative gearing is that when it was reinstated a few years later, three years-worth of claims from investors nearly sent the ATO broke.
The same scenario is likely to happen again if Labor pushes forward with a policy that is not only populist but economically foolhardy in my opinion.
Research shows that 93 per cent of investors choose established properties because they have the best capital growth over the long-term.
Plus, negative gearing is but a moment in time, with most investors in neutral or positive territory within a few years because of rising rents.
Of course, there remains myriad investment opportunities across the country at present with demand subdued and therefore prices.
While the wider economy might not be kicking many goals, it’s important to remember that this, too, is just a moment in time and our nation has a trajectory of growth for decades to come.
Labor has been continuing its negative gearing rhetoric over recent days and weeks, however, there does seem to be a slight change in tone.
Given the change in market conditions in many capital cities, a wise person might suggest that they should hold-fire.
Then again, when has wisdom had anything to do with government policy?
In a recent tv interview the opposition leader, in an attempt to grab voter attention, put out a bold statement of why should they help someone secure their 5th investment property when some are struggling to buy one. This is just playing to the media and voters, who are not silly, as someone in that investing position is actually doing several things that help the economy, not the least of which is providing housing for and ever increasing population and the fact that they (the investor) are well on their way to not relying on government handouts in their retirement.