Tax is shaping up as a major election issue.
Labor is proposing a massive change to existing arrangements by restricting negative gearing to new properties, and effectively increasing capital gains tax by reducing the present 50 per cent discount to 25 per cent.
They have announced these policies will be grandfathered, so they will only apply to assets acquired after a certain date (yet to be announced).
Labor believes investors enjoying tax concessions are competing with first-home buyers and thus driving up prices, making it more difficult for young people to acquire their first home. Reducing the tax concessions available to investors should cause demand to drop, and property prices to stabilise or even fall.
But a fall in property prices might not do much for aspiring homebuyers.
If a $500,000 property dropped 10 per cent to $450,000 the buyer would still need a deposit of at least $45,000, plus the income to service a debt of around $420,000 when mortgage insurance is taken into account.
It's wrong to compare Labor's proposed changes with what Paul Keating introduced in July 1985 and repealed in September 1987. He stipulated that losses on investment properties could not be written off against current taxable income, but would be quarantined to be offset against future income from the property when it became positively geared.
Under the current Labor proposals, as I understand them, any losses cannot be offset against future taxable income, but will be added to the base cost to reduce capital gains tax on the property when it is sold.
Labor's proposals also apply only to new properties - Keating's applied to all properties.
Expect much debate on these policies in the next three months.
A report commissioned by Master Builders Australia has forecast a decline in new home building of between 10,000 and 40,000 dwellings, and a loss of 7500 to 32,000 full-time construction jobs.
Master Builders tell me it's not the abolition of negative gearing per se that will cause a slump, but the combination of the new negative gearing and capital gains tax rules.
The distinction between new and established properties could have some serious consequences.
Think about a couple who decide to buy a $500,000 new investment property. They sign a contract subject to finance. The bank's valuer will do the valuation based on a forced sale of what would then have become an established property.
Valuers tell me this could reduce the valuation down to $450,000 and the application for finance may be rejected. If the contract is cancelled, there may be one less property available to be rented.
Political parties should understand that there are many investors who are terrified of shares and are wary of superannuation.
They buy property as their means of saving for retirement. This is a double win for Australia - it provides an ongoing supply of rental property, reducing pressure on rents and enables hundreds of thousands of Australians to become self-funded retirees with no expectation of help from the government.
Labor has promised that their capital gains tax increases will affect only assets acquired after a specific date in the future, which is yet to be announced. Once it is announced, expect a flurry of buying in both property and shares, as everybody who can jumps in before the tax rules change.
If this happens, it is highly likely to be followed by a significant slump in activity after the change date, because everybody who could buy would have bought.
But it's a paradox. A property, whether new or established, bought before the change will be worth more than one bought after the change for tax purposes. However, it may well be worth less at market after the change because there'll be fewer people who want to buy it.
The big question now is whether such radical property changes should be contemplated at a time when the market is in a slump, with strong indications that it may get worse.
- Noel Whittaker (firstname.lastname@example.org) is the author of Making Money Made Simple and numerous other books on personal finance.