Is Turnbull's property scaremongering justified?

Prime Minister Malcolm Turnbull reckons that Labor’s proposal to limit negative gearing to new dwellings will decimate house prices and erode the wealth of the Australian population.

To make a forecast for a fall in price for any economic or market variable, be it iron ore, wheat or house prices, some form of economic modeling must necessarily underpin the claims of a price boom, or in Mr Turnbull’s case, a bust.

Mr Turnbull presumably has subjected Labor’s negative gearing plan to such detailed economic modeling to arrive at his house prices forecast.

Also read: Sacred cow no more: what proposed changes to negative gearing really mean

Either that, or his claim is simply made up, a hunch or a prejudice.

He reckons demand from investors for established dwellings will fall sharply if Labor’s policy plan is ever implemented, which is no doubt true, but how much will investor demand for new dwellings rise?

What about demand from people currently frozen out of the housing market because of affordability issues? It is likely they will re-enter the market.

Mr Turnbull has been careful not to say how much he reckons house prices will fall when they are, in his words, ‘smashed’.

Does ‘smashed’ mean 10 per cent? 20 per cent? Or as we saw in Ireland, Spain, parts of the US and the UK during the global financial crisis, house price falls of 40 or 50 per cent?

No wonder some people are scared.

It is such a big issue that Mr Turnbull should release the specifics of his modeling of house prices.

What assumptions are in the model about the level of new construction that will result from the tax change? What will the change in GDP be from the shift in focus to new dwellings rather than established dwellings?

Also read: Is negative gearing really that bad?

How many more jobs will be created as a result? Are there any assumptions made about interest rates? Will there be a change in underlying demand for new dwellings from any price change?

What does Mr Turnbull’s modeling estimate for homeownership rates over the medium term?

There is also the question of Mr Turnbull’s forecast for house prices without Labor’s change, driven solely by investor demand it would appear.

Until we see the details of Mr Turnbull’s modeling, it is safe to say that his forecast for house price Armageddon is a hunch or a made-up number that has political and not economic motives behind it.

Most credible economists rate the plan to limit negative gearing to new dwellings a good idea.

One of the problems that has dogged the Australian housing market for a decade, perhaps longer, is the failure of construction to keep up with underlying demand.

Australia’s rapid population growth via immigration and natural increase means that, on average, around 175,000 new dwellings need to be built each year.

Any less, and there is a shortage and price pressures emerge. Until recently, new construction was below this level.

Also read: Three myths on negative gearing the housing industry wants you to believe

With a skewing of investment moving to new dwellings certain, if Labor’s plan comes to pass, property developers and investors will be keen to add to supply to meet what will be a lift in demand as investors still look to negatively gear their property portfolio.

The fact that such demand will be restricted to new properties will ensure a strong construction sector for many years.

Mr Turnbull would help his argument if you revealed some of the details of the modeling that shows a collapse in house prices. I suspect that he wont simply because the model does not exist.

 

Stephen Koukoulas is a Yahoo7 Finance expert with 

more than 25 years experience as an economist in government, as Global Head of economic and market research, as Chief Economist for two major banks, and as economic advisor to the Prime Minister of Australia.