The Labor Party’s modelling of investor loans that forms the basis of its negative gearing policies has been called into question by Empower Wealth broker and chairman of the Property Investors Council of Australia, Ben Kingsley.
In its shadow budget announcement, Opposition Leader Bill Shorten stood by Labor’s pledge to change capital gains tax and negative gearing should it gain power following the federal election on 18 May.
In March, the shadow treasurer announced that, from 1 January 2020, it would “make sensible and overdue changes to negative gearing to put young first home buyers on more of a level playing field with property investors seeking their sixth or seventh property”.
Labor said it would therefore retain negative gearing for new investment properties to help boost housing supply and jobs, grandfather all existing negatively geared investment properties made prior to 1 January 2020, and halve the capital gains tax discount for investments entered into after 1 January 2020.
The measures, according to Labor, could raise $2.9 billion over four years or $35.1 billion over 10 years.
Data is ‘woefully inaccurate’, says PICA chair
However, the chairman of the Property Investors Council of Australia and Empower Wealth CEO and broker Ben Kingsley has questioned the costings of this policy, arguing that the data used to form the basis of this policy is inaccurate.
Speaking to Mortgage Business, Mr Kingsley noted that shadow treasurer Chris Bowen last month told ABC Insiders that 96 per cent of negative gearing goes to existing houses, not new construction.
Mr Bowen said at the time: “If you allow negative gearing going forward, we’d grandfather all existing investments but we’d allow it going forward for new construction. That means, instead of 96 per cent going to existing houses, 100 per cent will go to new construction,” which he said would “spur investment”.
However, Mr Kingsley argued that this 96 per cent figure was “just wrong” and suggested that it was derived from statistics from the Australian Bureau of Statistics in relation to new financing, excluding construction, off-the-plan and newly erected property. The source of this information has not yet been confirmed.
The PICA chair went on to note that on Wednesday (10 April) at the National Press Club, Mr Bowen quoted that the Grattan Institute believes that 14 per cent of investor loans could be for new builds, and that there would therefore still be an 86 per cent failure rate.
Mr Bowen said to the National Press Club: “Either are unacceptable to me. We wouldn’t accept that kind of failure rate with any other policies.”
According to Mr Bowen, the BPO had reached a “prudent assumption” that – should Labor gain power and introduce its negative gearing policy – 22 per cent of negatively geared investment properties in the first year of the policy would be new properties.
This assumption reportedly drew on data from the ABS as well as data from the RBA and major banks.
However, Mr Kingsley told Mortgage Business: “What’s he saying is, if we can’t get people to buy new, that will be a boost to supply, that will be a boost to jobs. But the reality is that all of that has been based on flawed data supplied by the ABS.
“In our investigations, we discovered that the ABS do not report on existing property or new property breakdowns for investors. So they are assuming that it was all existing property for investors and only some construction loans were being classed as investment loans. So they were missing newly constructed dwellings, house and land packages and off-the-plan purchases.
“That is when we thought that this data is completely unreliable, and unfortunately it is being used by the Parliamentary Budget Office for their modelling. So, if you put bad data in, you’re not going to get any decent modelling out of it,” he said.
Mr Kingsley highlighted figures he collected through his mortgage aggregation group AFG, which showed that around 43 per cent of their broker-written investor loans over the past 12 months were for new properties, while 57 per cent were for existing properties .
He added that a large amount of apartments being built (and which are now suffering from falling prices) were sold to investors and would be negatively geared (but not “show up” in the data).
Mr Kingsley therefore suggested that the Labor Party’s assumptions regarding the number of negatively geared new properties was “woefully inaccurate”.
He estimated that around 45 to 50 per cent of negatively geared properties would be new properties, while the remaining half would be existing.
“That is more than double the estimated 22 per cent,” he said.
He told Mortgage Business: “So, if that is the case, then their assumptions on new construction is also now in question because it will fall from its current level of 50 per cent (if it is estimated to be 22 per cent after the first year of the policy) and that would mean a deterioration of construction, a deterioration of jobs, which would be a deterioration of the broader economy.”
He added that the revenue brought in by Labor’s negative gearing policy would also need to be revised, as “this could that their revenue receipts could be zero”.
“And why would they risk the economy, risk the property market, not only for investors but also for owner-occupiers, for a net sum game? While also introducing the concept of ‘new’ and ‘second-hand’ property across the Australian property market, which was always a contentious idea in the first instance.”
Mr Kingsley added that Labor’s taxation policies could potentially alter the property market significantly, so their policies must be reliant on accurate data.
He concluded: “If the data going in is wrong, then the models are completely unreliable.”
Mr Kingsley is therefore now calling on the BPO to release “all of their costing and all of their assumptions so that they can be peer-assessed by subject matter experts as opposed to being peer-assessed by academics who don’t have the knowledge as to where the data is being sourced form and the reliability of the data”.
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