Labor ignored warning of economic impact in its negative gearing structure: The Australian

The negative gearing debate is back to haunt Labor again, with The Australian newspaper reporting that the party stuck with its policy of limiting negative gearing to new homes despite opposition Treasury spokesman Chris Bowen being warned last year that it could hurt house prices and hit economic growth. 

Accounting and financial advice firm Bongiorno & Partners last year secretly commissioned BIS Shrapnel to analyse the effect of limiting negative gearing to new houses.

It communicated its findings to Bowen’s staff and then Labor ­financial services spokesman Bernie Ripoll, according to a report in The Australian. 

BIS Shrapnel’s report — which found limiting negative gearing to new houses could lead to lower house prices, rent rises of up to 10 percent, cost the budget more than it saved and cause unemployment to rise — sparked a political furore when it was publicly released last month.

The identity of the firm that commissioned the report was not released at the time, prompting Bowen to claim it was by “an anonymous vested interest”.

In attacking the document, Labor did not reveal it had received the advice last year from Bongiorno & Partners while it was developing its negative gearing policy.

“Whoever’s commissioned it, they know who they are, but then they’ve put it out on the newspaper anonymously, you’ve got to have the courage of your convictions when you’re in these policy debates,’’ Bowen told ABC Radio National on March 3. He claimed that “whoever paid for it” should get their money back.

The report was intended to be an economic document rather than a political document to inform policy development on the negative gearing issue, The Australian said.

Bongiorno & Partners is the same firm that commissioned research in 1983 as then Labor treasurer Paul Keating considered disallowing negative gearing. The report was ignored and negative gearing was abolished in 1985. In 1987 the then Labor government reinstated negative gearing.

Both Staff working for Bowen were briefed last July on the findings, while Ripoll was sent the report after a meeting with Tony Bongiorno, a partner from the accounting firm, at the ALP national conference last July.

After the report was publicly released last month, Labor seized on its finding that neither rents nor dwelling prices displayed any notable change of behaviour or deviation from trend during 1985-87 during Keating’s abolition of negative gearing. But Bowen dismissed its warnings that it could push down housing prices and increase rents.

“It is a poor excuse for analysis,’’ Bowen said on March 3. “It was commissioned by an anonymous vested interest who won’t even put their name to it. I mean that’s how much faith they have in it. And whoever paid for it she (sic) would get their money back because it is an atrocious piece of political propaganda, it is not analysis. It does not bear any scrutiny.’’

“From the start, media reporting of this BIS ‘analysis’ should have included a discussion of who commissioned it. Failure to do so is irresponsible.”

Labor plans to limit negative gearing to new dwellings from July 1, next year with existing investments grandfathered. After that date existing houses and share income could be offset against investment income but not against wages and salary income.

It also proposed halving the capital gains tax discount on assets held for more than 12 months to 25 per cent.

Property Observer earlier reported how Labor's policy and the government's seeming abandonment of any change, at least for the time being, could trigger diverse consequences. 

Like the balloon effect: squeeze a balloon in one place, and it inflates elsewhere, some vendors might bring their sales forward while others will bring their purchasing forward. Other owner occupiers and investors will delay.

It will be much more about the future value of people’s houses given Labor’s plans and the Government's seeming abandonment of any changes. 

It seeks to restrict the use of negative gearing in the property market to new homes, and to also halve the discount applied to capital gains tax.

Property Observer had also reported on BIS Shrapnel's report, Economic Impact of Limiting the Tax Deductibility of Negatively Geared Residential Investment Properties which said changes to the current negative gearing setup would go well beyond any saving of the income tax concession, to a multitude of unintended consequences.

It suggested new home building will shrink by around 4% nationally, or 7,200 dwellings a year and GDP would shrink by around $19 billion per annum on average, or 1 percent of Australia’s $190 trillion annual income.

The BIS Shrapnel report assumed the change was restricted to limiting negative gearing to new houses and assumed a start date of July 1, this year. It did not factor in the capital gains tax change.

It predicted higher rents would push 70,000 households into “rental stress’’, where they are paying out more than 30 per cent of their incomes on housing costs.

Median rents of $510 a week would need to rise by $73 a week in Sydney to provide an investor who had lost the benefits of negative gearing with an equivalent return.

Melbourne’s median rent of $370 would have to rise $56, Brisbane’s ($375) by $32, Adelaide’s ($280) by $29, Perth’s ($415) by $30, Canberra’s ($375) by $28, Hobart’s ($280) by $10 and Darwin’s ($465) by $20.

BIS Shrapnel found limiting negative gearing would result in “a short-run correction in real prices due to lower investor demand”.

“However, it will result in higher rents than would be expected with negative gearing,’’ the report said. “Landlords will require higher yields to compensate for the lost negative gearing concessions.”

The report said it was unlikely prices would fall enough to restore rental yields to compensate for lost negative gearing concessions. But a fall in prices would reduce the feasibility of development, causing construction to fall and rental supply to dry up.