RBA Saw Modest Effects From Labor’s 2019 Negative Gearing Policy

The Reserve Bank of Australia expected the opposition Labor party’s proposed changes to the tax treatment of investment properties would have only modest effects on house prices, rents and supply, according to documents released under a Freedom of Information request Wednesday.

Labor took to the 2019 election a policy to scrap negative gearing -- the ability to offset net rental investment losses against wage income -- for all but new housing and dwellings already purchased. The party was soundly defeated at the election. Labor has left open the option of taking similar changes to the next election, which is due by May next year.

Part of Labor’s difficulty in selling the program two years ago was that house prices had been falling for about 18 months, and the prospect of further losses spooked the electorate. In contrast, property is surging again in Australia, fueled by record-low interest rates as the economy recovers from Covid-19 pandemic.

RBA Saw Modest Effects From Labor’s 2019 Negative Gearing Policy

The RBA, in the documents dated February 2019, said the financial stability implications of Labor’s proposal included:

  • “Erosion of the equity positions of households in the near term if housing prices fall”
  • “Lower investor demand for housing may dampen price cyclicality and limit speculative demand (as shifts incentives away from capital gains and towards rental income)”
  • “Lower incentive to gear property purchases may reduce household debt”
  • “Substitution of investment into other asset classes”

The central bank noted analysis by Treasury found only a “relatively modest” downward impact on housing prices from the policy change. The Grattan Institute, a thinktank, predicted price falls of around 2%, with rents little changed.

“Estimating the overall effects of the policy is complex,” the RBA said at the time. “Our initial thinking agrees with these assessments. In the short-run, reduced investor demand could contribute to lower housing prices and dwelling investment; but in the longer run the overall effect on supply is likely to be minimal as developer margins are maintained through falls in the price of developable land.”

The bank listed the following beneficiaries of negative gearing:

  • 12% of adults own investment properties 61% are negatively geared
  • Investor share rises with income: almost 3/4 of investors are in the top two income quintiles
  • Top 20% of income earners receive more than 50% of the benefits of negative gearing

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