Negative gearing report ruffles feathers

A BIS Shrapnel report on negative gearing has been criticised by government and the Grattan Institute

Recent report findings that restricting negative gearing to new homes would see an increase in rent and decrease in property prices has ruffled feathers among industry and government.

The recent report by economic research firm BIS Shrapnel seemed to oppose Labor’s negative gearing policy, noting that curbing negative gearing could make capital city rents increase by up to 10%, while causing property prices to slump 6% by 2026.

Last month opposition leader Bill Shorten announced intentions to restrict negative gearing to investments in new housing as part of a Labor election promise, which he claimed would save the federal budget $32 billion over a decade.

According to the report, changes to investor tax concessions would result in negative economic effects that “go well beyond any saving” that the government would make.

It also claimed limiting negative gearing would dampen investor demand and exacerbate the housing shortage, with home building to shrink by 4%nationally, and GDP to shrink by $19 billion a year on average, it was forecast.

In a media release, Labor’s shadow treasurer Chris Bowen and shadow assistant treasurer Andrew Leigh slammed the report for “purporting to be Labor policy” noting it was “not analysis that stands up to any scrutiny”.

They argued the analysis was “not Labor’s policy” as it assumed negative gearing remained for other assets, such as shares, assumes losses can also be deducted within the property portfolio, assumes no changes to the Capital Gains Tax discount, and assumes a start date of July 2016.

Shorten and other Labor MPs have also criticised Treasurer Scott Morrison who, shortly after the report's release, referred to the findings as evidence that Labor’s negative gearing policy was flawed.

BIS Shrapnel has so far refused to reveal the identity of who commissioned the research, but associate director Kim Hawtrey told Fairfax Media that “it is not a political party, or lobby group, or industry group. It is a private client."

Mr Hawtrey also claimed the modelling was not focused on any particular policy and was not making any recommendations.

"The assumptions were set several months ago, and the analysis done late last year, well before Labor announced its policy," he said.

The report — which also misquoted the Australian annual GDP as $190 billion, well short of the true figure of more than $1 trillion — has also been criticised by John Daley of the Grattan Institute, who argued that limiting negative gearing to new builds would cause an increase in building.

SQM Research managing director Louis Christopher also commented on the report, telling Domain that it found the deduction that rent would increase so substantially over the longer term “hard to believe”, and that it’s likely the market would “adjust to the new reality”.

The Real Estate Institute of Queensland (REIQ) have supported BIS Shrapnel’s modelling, reiterating their belief that any changes to negative gearing would be “disastrous”.

In a statement issued by the REIQ, chief executive Antonia Mercorella said the report confirms what the it “has been saying all along – that investors would abandon property as an asset class, causing rents to rise and housing affordability to be crippled”.

In an article for the Australian Financial Review last week, Mr Hawtrey wrote that the brunt of a policy shift toward curbing negative gearing would ultimately be borne by low income earners, as rents will be increasing to restore effective yields for owners.

“We estimate that some 70,000 extra households would be pushed into housing rental stress. And that will probably require governments to step in to provide additional affordable rental housing,” he wrote.

“At the end of a 10-year horizon the market would find a new normal, but the legacy will be a lost decade of reduced home building and higher rents.”