What does Labor’s pivot on negative gearing mean for property investors?

Posted by Luke Graham

In late-July, Michelle Grattan of the University of Canberra penned an article for The Conversation analysing Federal Labor’s ‘small target’ strategy ahead of the 2022 election. The “de-Shortening” of Labor casts aside previous plans to reform franking credit cash refunds and raise taxes on capital gains. In addition, it looks like Federal Labor won’t meddle with tax reform introduced by the Coalition, meaning people earning between $45,000 and $200,000 will face a marginal tax rate of 30 percent (scrapping the 37% rate) from 1 July 2024 onwards. Politically speaking, this appears to be a subtle shift toward the centre by Labor.

I first wrote about Labor’s approach to negative gearing way back in 2016 when I was running Blue Wealth’s sister company, First Link. Our CEO, Tony, has also repeatedly shared his thoughts over the years—most notably through his 2019 article titled “Why negative gearing is a community service”. Over these years, our argument has been consistent: abolishing negative gearing doesn’t accomplish what its proponents think it does.

To recap some of the reasons the Blue Wealth family have generally opposed negative gearing reform, consider the below:

Negative gearing being the vestige of Australia’s wealthy elite is a myth. In fact, ATO data from the 2018-19 income year indicates that more than 90 percent of negatively geared properties are held by investors with just one or two investment properties. That’s a middle-class family with a retirement plan, not a Gina Rinehart or James Packer of the housing market.

Negative gearing’s link to unaffordable housing is based on flawed logic. Some argue that negative gearing gives investors a competitive edge over owner-occupiers, and that abolishing it would help get home prices under control. The fact is, when other countries have placed similar restrictions on private investors, they aren’t replaced with owner-occupiers. They’re replaced with government housing and institutional landlords. I’d argue that makes inequality worse, not better.

The road to hell is paved with good intentions. In an effort to stimulate economic activity and make homes more energy efficient, we had the pink batts scandal. Many years before that, we introduced the cane toad to handle the cane beetle problem. There are many initiatives that seem good at face value, but deliver hidden and often disproportionate consequences. In the state of Labor’s past policies on negative gearing, the property investment industry risked incentivising bad actors to sell shoddy new developments under the guise of being the last frontier of negative gearing.

…but now that Labor have ditched this policy position, what changes for property investors?

In practical terms, absolutely nothing. In emotional terms, however, it’s all the difference in the world. Having a more predictable market means having stronger market sentiment, which is one small ingredient in favour of healthy market conditions. This doesn’t mean it’s all smooth sailing from here on out, but it does mean it’s one less psychological barrier for a whole number of would-be investors sitting on the fence now and in the coming years.

Posted by Luke Graham, on 19th Oct 2021