Negative gearing changes will slam the vulnerable
There is a federal election on the horizon and housing affordability in our big cities is on the agenda.
Shorten's opposition has announced negative gearing reforms which, they say, will favour first home buyers over wealthy property investors while delivering a revenue windfall for the government.
Although Labor present their strategy of limiting negative gearing tax concessions to newly constructed properties while 'grandfathering' the arrangements of existing investors as a pragmatic policy to mitigate any negative fallout from completely abolishing the concession, the devil ultimately lies in the details.
And renters and retirees on self-managed super funds are set to take the greatest hits.
Recent months have already seen slowdowns in Australia's major property markets, with tighter controls on credit and investor loans taking effect alongside price falls of six per cent and four per cent in Sydney and Melbourne respectively compared to last year.
These outcomes call into question the necessity of radical changes to our property tax system like negative gearing reforms.
Shadow Treasurer Chris Bowen has responded by arguing that the reforms would be well timed - cooling demand means that the impact of a change for investors now will be far less than if the market were in a stronger position.
In theory, Labor's negative gearing changes, paired with cutting the Capital Gains Tax discount from 50 per cent to 25 per cent, favour owner-occupiers over property investors while encouraging investors to fund new construction projects, thereby broadening housing supply.
In the meantime, falling demand for existing properties from investors who cannot negatively gear, should mean lower prices for those trying to enter the housing market.
'Grandfathering' existing arrangements mean that investors who currently negatively gear can continue to do so, as can super fund holders whose funds possess such property investments.
An increase in new owner-occupiers mean that fewer people need to rent, offsetting an increase in rental prices on properties which can no longer be negatively geared by their owners.
This should also be mitigated by the introduction of new rental stock due to new constructions which can still be negatively geared.
In practice, though, things are a tad murkier.
While existing investors and super fund holders can still negatively gear their current properties, the properties' values will take a major hit on top of cooling investor demand that is already sweeping the property markets.
Owners and investors are often forced to sell their properties before they pay off the cost of their mortgage even with the benefit of negative gearing concessions which reduce their overall costs.
These are the individuals who will be worst impacted.
Contrary to Labor's spin, most of these people are not wealthy investors.
Those on taxable incomes of less than $80,000 a year are a vast majority of those currently benefiting from negative gearing - including many professionals, teachers, firefighters and nurses who worked and saved to enter the property market on the hope of building long-term wealth for themselves and their families.
Many are retirees who either own property through their super funds or who face bleak prospects when they downsize, with their limited earning capacity, limited super, and low savings levels.
Many of these lower or middle-class owners and investors would be left stuck with stranded assets, forced to service ongoing debts despite the benefit of negative gearing.
They face a monumental loss if they try selling these properties to new owners or investors who cannot access negative gearing and are unlikely to offer a price which could pay off their mortgage when more lucrative investments can be made in new constructions or in non-real estate investments.
Those who try selling before Labor's policy takes effect will face an already tepid property market flooded with properties like theirs.
As for renters, it is unlikely that new stock from future constructions and the movement of renters into home ownership will deliver immediate benefits.
Rather, rents on properties no longer susceptible to negative gearing will rise to cover the costs incurred by the owners.
Future constructions are likely to be concentrated in city fringes or recently rezoned areas for higher density housing.
These properties may not be suitable for renters commuting to the city for work or those with larger families.
New construction is also dependent on timely urban planning and rezoning by state governments and local councils who don't exactly have a good track record of doing so in tandem with rapidly expanding urban populations or in a way that mitigates the stress placed on our struggling urban transport infrastructure and services.
Radical changes which threaten our rental markets and will slam middle-class property owners, including retirees and super fund holders, with devalued assets and the potential of catastrophic debt to banks, are unnecessary at a time when property values are already going through a landmark correction which is set to continue for some time.
By contrast, wealthier investors who are better equipped to invest in new construction and development projects or other lucrative assets, will be the least affected by Labor's changes.
Given that half the people in NSW benefiting from negative gearing tax savings on investment property live in Labor electorates, this is all the more reason for Shorten to drop the claim that his reforms would simply be a 'tax on the rich'.
Satya Marar is the Director of Policy at the Australian Taxpayers' Alliance.