Labor unlikely to get all its feared housing policies through Senate: Goldman Sachs

Goldman Sachs has claimed fears around a home lending credit crunch, the housing "bust", the ALP housing policy and excessive apartment overbuilding, won't be realised.

Its commentary comes in a report that concludes that Labor will likely struggle to fully implement its feared housing policies should they win government next year.

The economists, Andrew Boak, Bill Zu and William Nixon especially questioned whether Labor would be able to pass the capital gains tax measures through the Senate.

"We are somewhat sceptical of the ability of the ALP to pass changes to the capital gains tax arrangements through the Senate given the likely make-up of the cross-bench – which in our view is the most impactful aspect of the reform package (as opposed to the changes to 'negative gearing')," they said.

The Labor opposition's proposal to limit negative gearing tax breaks to new housing investments would only lower an investor's return in the event of little or negative capital gain on dwelling values, the economists wrote in a report titled, Fear vs. Fundamentals.

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Bill Shorten announced Labor's plan to curb negative gearing and capital gains tax concessions in early 2016, saying it would stop a $10 billion tax subsidy to leveraged-up investors with big portfolios who were driving up prices and driving poorer first-time buyers out of the unaffordable housing market.

The Goldman Sachs report noted the impact from the proposal to cut the capital gains tax deduction from 50 per cent to 25 per cent would have a greater impact.

"The changes make property investing less attractive from a cash flow perspective, but negatively geared rental properties are already an unattractive asset from a cash flow perspective.

"The impact of the lower capital gains discount is somewhat more important, but we note this only binds when price growth is positive.

"This means that, from an individual's perspective, leveraged property investment will remain attractive if property prices are expected to rise and unattractive if prices are expected to remain flat/decline – regardless of the ALP's proposed changes."

Their report suggests the CGT policy would in total reduce the return by about a quarter over the average annual return of an investment.

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"In our view, while there is a kernel of truth to many of the popular narratives, a close inspection of the data suggest most are overly negative," the report advised.

"That said, we acknowledge the housing market presents a clear downside risk to our fairly upbeat 2019 outlook – including our expectation that the RBA will raise rates in late 2019."

It noted tighter credit rules did not constitute a "credit crunch" that typically happened when banks became unable to lend.

"The value of finance approvals to investors in NSW and Victoria continues to fall sharply, but is little changed elsewhere; while the number of finance approvals to owner-occupiers remain fairly elevated in NSW and VIC (albeit a bit weaker) and mixed in other regions," the economists said.

"In our view, this remains broadly consistent with our earlier view that the primary driver of softer loan approvals over 2018 has been lower demand from investors – driven by a normalisation in expectations for capital gains in Sydney and Melbourne."

Tighter scrutiny of mortgage applicants' expenses was slowing approval times, but the effect was likely to be temporary, they said.

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"This slower processing period may well take a few months to wash through and cause some temporary distortions in the interim," they said.

"The evidence that supply-side credit tightening is significantly worsening is not compelling to us."

They also suggested they did not see widespread stress as interest-only loans converted to principal-and-interest mortgages requiring higher repayments.

The greatest risk to housing demand and housing construction, would come from severe immigration cuts, the report said.

"In our view, the much more material risk to both the underlying supply/demand balance and the level of construction activity would be a significant reduction in population growth."

"We note Prime Minister Scott Morrison recently proposed to reduce Australia's annual permanent migration quota by up to 30,000 per annum (or about 15 per cent) and redirect new migrants away from Sydney and Melbourne.

"While formal changes are yet to be made – and the impact on population growth of this proposal would likely be negligible given (i) actual permanent migration is already below the current cap, and (ii) the measures don't address the large amount of temporary migration – the increasing political focus raises the possibility of a more substantial policy shift in the future."

Boak advised while housing does present a real risk to the Australian macro outlook, he believes "the doomsday chatter" is inconsistent with the underlying data.

"Our conclusions may not be as dramatic as some out there – but hopefully the focus on the data brings some balance and perspective to the debate," he suggests.