House prices will fall ‘materially’ under Labor, warns economist

Speaking to Mortgage Business for a special episode of the Mortgage Business Uncut podcast, the founder, co-CIO and portfolio manager of Coolabah Capital outlined what the economic ramifications could be should the Liberal or Labor Party win the federal election later this month.

With the latest Newspoll showing that the election race is a close call (the gap between the Liberal-National Coalition and the Labor opposition has narrowed on a two-party preferred basis to 51 per cent to 49 per cent in Labor’s favour and the Coalition’s primary vote has pulled ahead of Labor’s), economist Christopher Joye outlined that the property market could look very different depending on who is in power.

According to Mr Joye, the economy is currently in “reasonably good shape” as GDP has been growing over the last five years, the jobless rate has fallen from 6.4 per cent to circa 5.0 per cent, and there has been “record employment growth” and “very, very high commodity prices”. 

“The budget is in surplus [and] the housing market should start stabilising very soon, [so] I don’t think the government needs to do much [to get the economy ‘back on track’],” he said.

“What I don’t think government should do, which is what Labor is proposing to do, is this constant reallocation and interfering in the machinery of the economy by redistributing from one particular sector to another,” Mr Joye said.

“I think this idea of increasing wages in one specific sector of the economy but not touching wages elsewhere and taxing winners, particularly punitively, in order to provide more income to losers – this is basically a central political party saying that they know better than the market mechanisms, that they know better than all the folks that are working day to day in the economy and I don’t trust politicians to make those decisions.”

Mr Joye suggested that, on a macroeconomic level, a Liberal Party win would be more beneficial to the economy than a Labor win.

He told Mortgage Business: “We are definitely of the view that if Labor wins the election, house prices will fall materially further. We are of the view that the removal of negative gearing is very negative for the housing market and the 50 per cent increase in capital gains tax (CGT) will also be very negative for housing. So our view is that if Labor wins, house prices nationally will fall 15 per cent…

“I think if the Coalition wins, the housing market will stabilise very quickly, and I certainly believe that if the RBA cuts the cash rate... the housing bust is absolutely over. I think house prices will stabilise and may start to climb higher again. But it really depends on the politics and who wins the election,” he said.

Mr Joye, who said he was not a member of the Liberal Party, added that “if you look at the last 30 years of data, pretty much all the budget deficits come under Labor and almost all the surpluses come under a Liberal government”.

He continued: “My concern with Labor is that they constantly want to rewrite the rules of the economy and the rules of the game. Whether you are a business and operating according to a certain set of rules – so you might be a builder, a tradie, a property developer or a non-bank lender – Labor wants to rewrite those rules and that is going to very adversely affect you.

“But also if you are an investor, if you are a retiree and built up a share portfolio, a bond portfolio and a hybrid portfolio, Labor wants to change the rules of the game and those rule changes will apply retrospectively and they will hit you very badly.”

The fund manager went on to warn that the negative gearing and CGT policies put forward by Labor could impact the property market at large.

He elaborated: “Labor says it is going to grandfather for existing property investors and there is this idea that they will be protected from the changes. That is totally incorrect. Whilst you may be able to continue to negatively gear and you won’t pay 50 per cent higher CGT, the person buying the property off you when you sell it, they will. And that will be priced into the valuation you get.

“So, your valuation will be very adversely affected if future buyers can not avail themselves of negative gearing and if they pay 50 per cent higher CGT. So it affects everybody.”

He concluded: “I think the economy right now needs to be empowered to fulfil its potential. I think that potential growth will be significantly higher under the Liberal Party than the Labor alternatives.”

Find out more about Christopher Joye’s thoughts on the RBA cash rate and his projections for economic growth in the bonus episode of Mortgage Business Uncut, out now.

[Related: Banks, RBA and APRA consider ‘alternative’ to cash rate cut]