The negative gearing debate continues to ring alarm bells and spark heated conversations amongst investors, politicians and real estate bodies this week.
Labor wants to reform negative gearing, and the capital tax discount, July 1, saying the move will help "put the Australian dream of home ownership back within the reach of middle and working class families".
Labor's intention is to limit negative gearing to newly constructed investment properties only.
They say negative gearing and the capital gains discount have not achieved the aim of boosting housing supply or encouraging the new builds.
High income earners
Labor says that the major benefactors of the current arrangement are largely high income earners.
Prime Minister Malcolm Turnbull, however, believes that Labor's plan would actually hurt those who most need the help.
During Question Time recently, he said that while Labor's policy would only allow negative gearing on new homes, net rental losses on existing homes - which make up a large part of the market - will still be deductable from other investment income.
And, he said, those with a lot of investment income are generally the wealthiest.
He believes that it will be the average wage earner, who has little or no investment income, who will suffer.
The Prime Minister is not alone in his condemnation of Labor's policy. The Real Estate Institute of Australia (REIA) says it will not achieve the claimed objectives of improving both the supply of housing and housing affordability.
REIA President Neville Sanders said the policy was built on the popular perception of the declining amount of investor loans committed to new housing construction, relative to the total value of housing finance for established properties.
“Independent research commissioned by the REIA shows that around 27 per cent of all loans for the construction of new housing in 2014 were to investors and that this proportion has remained relatively constant over the last 30 years. The absolute amount of investor loans committed to the construction of new housing has increased by more than seven-fold since 1986.
“Whilst supply is acknowledged by all as critical in resolving the affordability problem the proposed changes by Labor’s policy will do nothing to address it. If anything it may exacerbate the affordability problem.
“Supply is constrained by a number of long-standing challenges, including regulatory and zoning constraints and cost structures including taxing of building. These factors are not addressed in Labor’s policy.”
The REIA says it is highly unlikely there would be the supply response anticipated by Labor and instead, many investors would exit the rental property market resulting in higher rents.
Turmoil and volatility
“Should it be implemented this change is likely to add considerable turmoil and volatility to the rental property and housing markets. Further, it would probably not raise much additional tax revenue,” Mr Sanders said.
“The proposal fails the general principle of good taxation policy that it should not favour particular investment classes. Limiting negative gearing to new dwellings will only add a distortion that reduces investment in housing, erode housing affordability and put upward pressure on rents."
Indeed, the Prime Minister is under pressure from his back bench to extend negative gearing.
Of course, all of this comes amidst debate over when the next federal election will be held. Some are suggesting it could be as early as July, although winter polls are not generally favoured.
Right now, we don't know, and Labor's plan to change negative gearing relies, of course, on them winning the election. So, for now, it's a case of WATCH THIS SPACE!