In what can only be described as homicidal economic science, Bill Shorten and Labor want to eradicate all negative gearing, except for new home constructions and reduce the capital gains tax discount from 50% to 25% (applying to assets held for more than a year). To make things really explosive, Shorten also announced that none of the changes would apply to properties purchased before July 2017.
Apparently, Shorten thinks this will solve the housing affordability ‘crisis’ while giving the government an extra $3 billion a year to play with. In other words, nowhere near enough money to solve the budget catastrophe but plenty enough to wreak havoc on everyday people’s lives and create complete uncertainty in the economy.
Nobody can accurately predict what this policy would result in. There are simply too many crazy and contrasting variables being slammed into each other. Of course, this then begs the obvious question: why would anyone want to do this? When you look through some of the basic consequences of the policy, the answer becomes clear.
Firstly, there would be the strong possibility of an immediate and artificial housing boom/bubble as people stomp over their grandmothers’ graves to get ‘lifetime negative gearing’ on pre-July 2017 properties. On this point, I wonder if Shorten has even considered the possibility of people perpetually refinancing their pre-2017 properties until they die and using the funds for other investments – i.e. keeping their pre-2017 properties permanently geared to the maximum amount possible as they rise in value over time. Let’s hold that thought for a moment…
Then, once the magic date hits in July 2017:
- There would be a clutch of people who have just bought or still own pre- July 2017 properties and won’t sell even if you put a gun to their heads. This would especially be the case if:
- they have bought high during an artificial boom which then quickly deflates somewhere around July 2017; or
- THEY ARE ALLOWED TO KEEP REFINANCING THE **** OUT OF THESE PROPERTIES UNTIL THEY DIE.
- With the property pupu platter that’s left over, there would be twin mixed government price signals: one creating lower investment demand for established housing, and another encouraging increased investor demand for building new homes.
- Demand for building services would increase, driving up building costs (which are already insane). Aside from screwing over investors, this will make it even more difficult for ‘working’ families to build their own dream homes.
- Last, but not least, all the extra building activity would create plenty of fat for construction unions to chew on. Mmm, delicious.
And finally we arrive at the likely heart of Shorten and Labor’s motivation (NB: any time Labor comes up with a policy that defies all common sense, just think to yourself ‘how would this help unions ‘procure’ more money’ – then all will become clear).
If the Liberals had any brains, they would zero in on this policy and make a much bigger election issue out of it.
(*) The substance of the above material was initially published within another post on The Marcus Review on 18 February 2016. Given the significance of this issue, this material now has its own dedicated post.