Adept Economics says plan would have ‘risks’ but cutting capital gains discount could make housing more affordable

This article is more than 4 years old

This article is more than 4 years old

Labor’s plans to restrict negative gearing would have “undesirable risks” and come at a “precarious time” for Australia’s property market, a new report has warned.

But the report by the consultancy Adept Economics agrees in principle with Labor’s argument that a reduction in the capital gains discount may help make housing more affordable.

It is the first report to fully model Labor’s twin policies of restricting negative gearing to new properties and cutting the capital gains discount from 50% to 25%.

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Property prices may fall by up to 4% across the country on average under Labor’s plans, it says, because lower rates of returns would make investment properties less attractive to invest in.



That implied a reduction in the value of a typical $500,000 property of between $15,000 and $20,000, over a decade, as the policy changes were absorbed by the market, it says.

“This would certainly not imply a property market crash,” said the report, which was commissioned by Brisbane-based Walshs financial planning. But it said the drop in house values was “not insignificant”.

The predicted declines were slightly more than the 2% predicted by the Grattan Institute.

The report also said the first component of Labor’s housing policy – restricting negative gearing to new properties – was “not well founded in theory or evidence” and it warned the ALP to proceed with caution on this point it if won the election.

But it agreed with the principle of the second component of Labor’s policy – to reduce the capital gains tax discount – because there is a case for reducing the CGT discount, it says, though not to the same degree as Labor is proposing.

Gene Tunny, the founder of Adept Economics, told Guardian Australia the estimated reduction in house prices “would probably happen over time, not immediately”.



“It’s a one-off impact based on returns to investors being lower,” he said. “The rate of growth would ease over a few years and then the market would absorb the policy change.”

The treasurer, Scott Morrison, seized on the report on Tuesday, saying Labor is showing a “reckless disregard” and “wilful ignorance” about what kind of impact their policy will have on the economy.



“This is a very sensitive time in our economy – it cannot afford Labor’s housing tax,” Morrison said. “So wilful is that ignorance that they refuse to release anything which sets out what the impacts on the property market will be.”

It is the third time this year that Morrison has relied on private economic modelling to discredit Labor’s negative gearing policy.



In March, he seized on modelling by the consultancy firm BIS Shrapnel that predicted $19bn would be wiped from Australia’s gross domestic product and rental prices would jump by 10% if negative gearing was abolished on established dwellings.

Morrison said the modelling was “an indictment on Labor’s policy” and demonstrated that “they just haven’t done their homework on this”.

But BIS Shrapnel associate director Kim Hawtrey later told journalists his modelling had been conducted “well before” Labor’s policy had been announced, so it wasn’t modelling of Labor’s plans at all.

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In May the advisory firm MacroPlan Dimasi prepared modelling warning that Labor’s negative gearing proposals would “create market chaos” and be “difficult to police”.

It said established house prices would fall by 3% to 4%, rents would jump by 8.8% for some properties and it would create a “resale price cliff” for apartments that had been purchased off the plan.

It was prepared by Brian Haratsis, MacroPlan Dimasi’s executive chairman and a member of the Property Council of Australia, who is a friend of Greg Paramor, a former chairman of the Property Council.

A draft copy of the modelling was sent to Guardian Australia and Fairfax Media before there could be an official release of the document, so there was no big bang announcement.

