Why Treasury thought Turnbull was wrong on negative gearing

Property Mandurah 051211 AFR pic by Erin Jonasson. First use AFR please.. construction and building at Mandurah residential property being built on one of the canals. new housing developments on the man made canals sea side boom town about 60km south of Perth W.A. Western . construction, house, houses, apartments, luxury living by the sea, generic hold for files. SPECIALX 00045252Malcolm Turnbull knew or ought to have known that the claims he made about Labor’s housing policy during the election were likely to be wrong.
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The Treasury pointed it out in the lead-up to the campaign.

Ramping up his rhetoric in order to win the election, Turnbull said Labor’s plan would “devalue every home, every property, in “.

It would “smash up home values”, “pull the rug out from under the property sector”.

It was “a big sledgehammer” aimed at the property prices.

Except that the Treasury didn’t think so, and had spelled out its reasoning in a memo delivered to treasurer Scott Morrison as Turnbull was sharpening his lines.

Far from disowning the memo, the Treasury has spent much of the past two years arguing that its contents reflected its genuinely-held opinion.

Fighting to prevent its release to the ABC under the Freedom of Information Act, it told the Office of the n Information Commissioner that publication would harm its “ability to provide candid and confidential advice to ministers in the future”.

Here is that candid and confidential advice. Labor wanted to limit negative gearing to newly-built homes. Losses from investments in other homes and shares could still be deducted from income, but only from investment income. Existing investments would be unaffected. And the capital gains from those investments would be taxed more heavily, at three-quarters rather than half the income tax rate.

Treasury said the changes would have a “relatively modest” effect on prices.

Returns for investors would fall. But owner-occupiers, unaffected by the changes, would be “likely to limit the extent to which is an impact on prices”.

“Overall, price changes are likely to be small, though the composition of ownership may shift away from domestic investors,” the candid assessment concluded.

Labor’s policy, or cut-down versions of it, has been supported by the Property Council, the Business Council, the head of the Abbott government’s Commission of Audit, the head of its review of the financial system, the Reserve Bank governor Philip Lowe, the Institute of Company Directors, and the Committee for the Economic Development of .

Treasury, but not Turnbull, thought they were on the right track.

Peter Martin is economics editor of The Age.

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