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Labor's Negative Gearing Blunder

Negative gearing on property investments will be removed on new housing from 1 July 2017 under a new proposition put forward by the Labor Federal Opposition if they are elected at the next election. This is a major concern as it will only exacerbate the existing affordability problems. Speaking about budget reform, opposition leader Bill Shorten said the current negative gearing policy and capital gains will cost this year’s budget over $10 billion. But limiting negative gearing under Labor's plan, says Shorten, will lead to the construction of thousands of new homes and boost economic growth. All current investments – and any made before 1 July 2017 – will not be affected by this change and will be fully grandfathered. However, the Real Estate Institute of Australia (REIA) said Labor’s plan to limit negative gearing to newly constructed investment properties will not boost housing supply at all and will only dry up new construction activity which will force up prices and severely and adversely affect housing affordability. We agree and wonder how they think that this would work? The policy is a potential blunder and not at all practical or realistically viable. If this the type of policy of alternative government, we as Australians should be very scared. Supply is constrained by a number of longstanding challenges including regulatory and zoning constraints and cost structures including taxing of building. These factors are not addressed in Labor’s policy. As a consequence, it is highly unlikely that there would be the supply response anticipated by Labor and instead many investors would exit the rental property as the cashflow and financial benefits are not present and the market will without doubt bear higher rents. The proposal is a big fail in 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.

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