How Labor’s plans to revamp negative gearing could put a floor on house prices and lower rents
The economic policy debate over Labor’s plans to overhaul the negative gearing rules is hotting up.
It is an important debate on a policy change that will have implications for the housing market, particularly for first home buyer and investor demand.
The government is claiming that the negative gearing change will “take a sledgehammer”, “smash” and “punish” everyone in Australia. Treasurer Josh Frydenberg says that under Labor, “your home will be worth less and renters will pay more.”
It is a frightening scenario for property obsessed Australians with the value of all dwellings in Australia estimated to be around $7 trillion.
But is it true? What are the facts about the current housing cycle and how will Labor’s plans to revamp negative gearing impact the housing market?
An RBA rate cut is not about housing – it’s about exports and investment
Many people misunderstand my concern about falling house prices and the coincident call for the Reserve Bank to cut official interest rates.
Any interest rate cut that the RBA may yet deliver should not, and certainly will not, be aimed directly at supporting house prices. On the contrary – future interest rate cuts should be directed at supporting the economy more generally at a time when the house price falls threaten to erode household wealth, consumer spending and the economy more generally.
The house price declines in the current downturn are much what I was forecasting a year ago. The issues surrounding the price falls are being compounded by the recent acceleration of the decline, the historic collapse in housing auction clearance rates, the escalation of the bank credit freeze and the on-going problems with low wages and inflation that are all creating an environment that will hit the economy into 2019.
While a recession in Australia is still unlikely, very unlikely in fact, there is a growing risk the unfolding mix of events will hit the economy hard.
The destruction in household wealth from the falls in house prices alone is now about $300 billion. Add to this another $100 billion of wealth destruction from the recent fall in the stock market, and a climate of severe weakness in consumer spending is front and centre in the outlook for most credible forecasters.