It's unlikely Labor's plan to make Australia's housing market fairer will wreak havoc on the economy -- even in a worst-case scenario

Mark Dadswell/Getty Images
  • Industry groups are lining up to warn about the economic impact of Labor’s plan to make Australia’s housing market fairer.
  • However, even under a worst-case scenario, recent modelling from Cadence Economics, conducted on behalf of the Master Builders Australia, suggests the overall impact on the broader Australian economy may be quite insignificant.
  • Importantly, the modelling does not take into account any offsetting policies that could be introduced given an expected increase in budget revenues.

Industry groups are lining up to warn about the economic impact of Labor’s plan to make Australia’s housing market fairer.

The proposal to limit negative gearing tax concessions to newly constructed homes, and halve the capital gains tax discount from 50% to 25% for homes held for a period of greater that 12 months, has led to claims it will lead to widespread job losses, fewer home being built and, as consequence, upward pressure on home prices, seeing affordability levels deteriorate further.

According to modelling from Cadence Economics conducted on behalf of the Master Builders Australia, the proposed changes could see 42,000 fewer homes being built in the five year period following its implementation, resulting in a reduction in the value of residential building of as much as $11.8 billion.

It forecasts the value of home renovations could also be reduced by as much as $210 million. It also claims the policy changes could see employment fall by as much as 32,000 across the country.

“Labor’s policies on negative gearing and CGT fails its own test,” said Denita Wawn, CEO of Master Builders Australia, referring to Labor’s plans to make the housing market fairer for first home buyers and to encourage new home to be built.

All the figures sound alarming, especially at a time when the housing market is the weakest that it’s been at any point in years.

However, are they really as bad as they seem?

Based on the evidence offered below from Macquarie Bank, it suggests the policy changes may not have that much of an impact on the broader Australian economy, even in the worst-case scenario modelled by Cadence Economics.

The first chart shows the impact on GDP growth over five years.

Macquarie Bank

Based on the worst-case scenario, the total drag on GDP growth is very small — less than 0.2 percentage points in the first year after implementation before reducing to 0.1 percentage point five years after the changes are introduced.

Nor is the expected drag on construction output expected to be all that large over the same period in an adverse scenario, reducing it by just over 0.2 percentage points in the first year and less than 0.15 percentage points by year five.

Macquarie Bank

The declines in dwelling starts are expected to be a little larger than total construction output given the proposed policy changes are aimed at the residential sector, ranging from just under 5% in the first year to around 3% by year five.

Given investors tend to favour apartments rather than houses, the declines are expected to be more acute for the former under an adverse scenario.

Macquarie Bank

While the reduction in residential building will drag on construction employment in a worse case scenario, annual declines of less than one percentage point of total construction employment are forecast in the five years following implementation, with the largest decline seen in the first year.

Macquarie Bank

And with construction sector employing around 10% of the Australian workforce, the impact on broader employment growth is expected to be negligible at less that 0.1 percentage point per annum.

Macquarie Bank

Crucially, the modelling conducted by Cadence Economics does not include and redistributive effects from the tax savings proposed by Labor.

While the Labor party is projecting running larger budget surpluses than the Coalition based on latest forecasts, the additional revenues received from the tax changes could be deployed to help offset its impact.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.