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Is negative gearing about to change?

If the polls and betting markets are correct, there is a good chance that Labor will win the next election and the negative gearing rules that have driven personal investment in housing for many decades will change.

With the Federal election set to be held late this year or early next, Labor are committing to change the policies regarding negative gearing which will radically change the way future investment in the housing market will be allocated.

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It is important to emphasise that Labor is not planning to get rid of negative gearing. Far from it.

Labor’s policy change boils down to keeping the existing rules for negative gearing for investors buying newly built dwellings, but ending the eligibility of negative gearing for established dwellings.

For those investors wanting to negative gear, and there is no doubt there will still be many, it will still be available for new properties. Fill your boots, as they say!

It has been obvious for many years, perhaps decades, that one of the critical issues driving the extreme price rises in the Australian housing market is a lack of supply, relative to demand which has been driven by rampant population growth. In other words, there has not been enough new construction to adequately house the extra population and this shortage has seen prices rise.

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The Labor policy change will encourage investment flows to new construction and over time this will help to address the supply / demand imbalance.

What the change to negative gearing will also mean is that demand from investors for established dwellings will fall away markedly. To be sure, people will still be able to buy multiple investment properties if they so desire, but they wont be able to use the tax laws to get other tax payers to subsidise the interest on the debt used to purchase those dwellings.

The change will, quite plainly, take away one segment of demand in what has been an overheated part of the established housing market. Over time, this will allow other segments – first home buyers and those looking to upgrade – to step into the void and buy established dwellings without the intense competition from investors.

Over time, this is likely to help reverse the fall in home ownership rates that has been evident since the early 1990s.

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What is also important to note is that Labor’s proposed negative gearing rules will mean a net improvement to the Federal budget by $37 billion over the next decade. That is $37 billion which can be used to either reduce debt, partially fund health and education and other important government services.

It is difficult to see why there would be any objection to the proposed rule changes, other than perhaps from real estate agents in well established suburbs who may lose a little business as investors move their attention to new dwellings.

For political reasons, the Coalition is set to maintain its fear campaign against the rules, even though Treasury and most other credible forecasters have estimated the impact on house prices from the law change is negligible.

Debate is also likely to be muddied by the fact that house prices are now falling, especially in Sydney where prices have dropped over 3 per cent in the last four months and Perth prices are down over 10 per cent over the past three years. It is important to note that this is happening on current policies, with negative gearing rules still prevailing. This fact alone should be a hammer-blow to the fear campaign.