If the polls and the bookies are right and Bill Shorten moves his belongings into the lodge in Canberra after the election on Saturday, Australia and its economy will change forever.
Even if Scott Morrison unexpectedly retains office, things are set to change, although not nearly as much because the Coalition has much more of a steady as she goes approach compared to Labor’s significant raft of tax and benefit changes.
So, here are some of the changes we might see after the election.
First home buyer’s bonanza – or is it?
One change that we are sure to see whoever wins is an unusual first home buyer’s scheme in which the Government effectively goes guarantor for first home buyers – meaning they only need a 5% deposit rather than the customary 20%.
The details around this policy are somewhat woolly – initially, Prime Minister Morrison said it would apply to 10,000 first home buyers a year, then after Opposition leader Bill Shorten promised to match it, the PM seemed to expand the policy to all first home buyers, according to demand.
That could potentially make the scheme 10 times bigger, although there will be price caps depending on which area first home buyers will live in.
There are a few effects that we should expect from such a policy.
One is that there would be a surge in first home buyers and potentially an upwards price response at the lower end of the property market, depending on the size and success of the scheme.
Another is that there will be a new set of first home buyers with bigger mortgages that are more expensive and will take longer to service – which is great news for the banks but not such good news for mortgage insurers (who traditionally insure the banks for loans with a deposit of less than 20%) and potentially bad news for the buyers themselves, who will be paying many thousands extra for more years than if they had saved a larger deposit.
The final effect is that the Federal Government will be on the hook to some extent as the effective guarantor for these first home buyer loans, should there be a larger than usual number of defaults, which is possible with lower deposits and higher repayments.
Franking credits – get ready for the big shift
One of the most contentious policies – Labor’s eradication of cash refunds for excess dividend franking credits – will really change the way the Australian system works.
While this change has been cast as a “retiree tax” by the Government and has been deeply unpopular with retirees, it will have a much wider impact than simply delivering wage cuts or tax increases (depending on your point of view) to a significant cohort of self-funded retirees.
In superannuation, it has the potential to change the entire landscape.
Self-managed funds with only retired members in them will be deeply disadvantaged so there will be a big shift to either recruit some younger family members into the self-managed fund or ditch it partly or entirely and join a large industry fund with lots of young members so that the franking credits can be used.
Apart from this massive change, there will also be a change to investments within superannuation funds, particularly those that only have retirees as members.
With franking credits less relevant, offshore share markets become much more attractive, despite their generally smaller yields.
Also, New Zealand companies listed in Australia and local companies that pay unfranked dividends will become more desirable – as will a variety of yield funds of all shapes and sizes, onshore and offshore, equity and debt.
It certainly would not be a surprise to see some “unfranked dividend funds’’ or more “offshore yield funds” pop up on the Australian share market to cater for the demand.
As for retirees with Self-Managed Super Funds (SMSFs), one strategy will be to roll over the Australian shares part of their fund or even the entire fund to an industry fund with lots of younger members to protect their existing income and franking credits.
With most industry funds accounted as one consolidated fund, excess franking credits from the retired members can easily be used to offset tax payable for those in the accumulation phase, making full use of all franking credits and boosting overall returns.
Of course, all of this changed behaviour will have the effect of reducing the $56 billion revenue projections that Labor has estimated it will reap from changing the rules.
Negative gearing and capital gains tax discounts
These are the big daddy changes that will have a significant long-term effect on the Federal Budget, shovelling billions of extra dollars into the coffers.
Of the two changes, the halving of the capital gains tax discount from 50% to 25% has had the least discussion but over time will have the greatest impact as capital gains build up and are taxed more heavily.
It will be quite an efficient tax in terms of collections because all of the data is already accurately supplied and monitored by the Australian Tax Office and applies to all asset classes including property and shares.
If Labor wins, both changes will apply to properties bought after 1 January 2020, leaving a short window after the election before they come in.
AMP capital chief economist Shane Oliver said he thought the effect on house prices will be bigger than the proposed negative gearing changes, while Shadow Treasurer Chris Bowen said the proposed changes will increase property market access for low income earners
“I know there’s been a lot of focus on negative gearing, but my feeling is that it’s the capital gains tax, the discount there that will have the bigger impact,” Mr Oliver said on the ABC’s 7.30 program.
Price boom caused by capital gains tax discount?
Some economists think that the introduction of the 50% capital gains tax discount brought in in 2000 was one of the biggest factors driving the Australian property boom from that point onwards, because it allowed individuals to enjoy much lighter tax on their capital compared to their personal exertion income.
The question now is, will the halving of the capital gains tax discount and the new restrictions on negative gearing have a negative impact on already weak property markets?
It is a difficult question to answer, particularly when you may have newly empowered first home buyers replacing investors at auctions, but there is certainly a possibility that rents will rise and that property prices will remain weak.
Two speed housing market
The negative gearing changes could also introduce a two-speed effect on the property market because of the new differences between investing in new properties compared to established rental properties.
Negative gearing will still be able to be claimed by investors who buy new properties, so these prices might remain quite firm and the building industry might begin to recover.
“Used” rental properties could be quite a different proposition.
With reduced investor interest due to the lack of negative gearing deductions, that will mean “used’’ rental properties are more likely to be sold to owner-occupier buyers or will be valued much lower by property investors to overcome the lack of negative gearing deductions.
Either ways, rents could rise to cover lower returns for investors and property price movements will have a whole new set of variables to adjust to.