The Reserve Bank has taken aim at the Abbott Government’s stand on negative gearing, pushing for a review of Australian housing policy. Despite the government spending billions annually via various tax incentives, home ownership rates are effectively unchanged over the past half century.
“The Bank believes that there is a case for reviewing negative gearing, but not in isolation,” the bank said in a submission to the Home Ownership Inquiry. “Its interaction with other aspects of the tax system should be taken into account.”
According to the RBA, "Australia’s treatment of property investors is at the more generous end of the range of practices in other industrialised economies". Other countries have negative gearing, for example, but few allow losses on property or shares to be offset against all sources of income, including your wage.
Combine that with Australia’s generous capital gains tax deduction and we have a recipe for debt-fuelled property speculation. With investors now accounting for over half of all new mortgages -- and nearly 60 per cent of new mortgages in New South Wales -- that is precisely what we have created.
The house price-to-income ratio boomed after the Howard government introduced the capital gains tax deduction in 1999. Other asset classes have also benefited but “since property can usually be purchased using higher leverage than other assets that produce capital gains, property is especially affected by this feature of the tax system”.
These days, housing policy has combined with historically low interest rates to drive the housing market into increasingly uncharted waters. The house price-to-income surged to a new peak earlier this year and is set to push higher before prices begin to moderate.
In other areas, our tax treatment of property isn’t so generous. In the US, for example, it is possible to deduct mortgage interest repayments from your personal income. Nevertheless, home ownership rates in Australia are slightly higher than in the US.
A range of policies have been suggested to improve household affordability and home ownership rates, particularly among younger Australians, but most of them are counterproductive.
The most infamous policy is, of course, the first home owner grant. Research shows that this policy primarily benefited existing home owners due to the speed in which the grant was absorbed into asking prices and higher debt. Rather than boost home ownership, it effectively acted as a wealth redistribution vehicle from younger to older Australians.
The bank believes that “it would be counterproductive to try to encourage more home ownership by making it easier for marginal buyers to borrow more”. It states it would not “support measures that expanded credit supply to households at the expense of prudent mortgage lending standards”.
Hopefully this put an end to absurd suggestions that we allow households to use their superannuation to pay for a housing deposit.
“Given the value Australia households place on home ownership, policy should not unduly advantage property investors at the expense of prospective owner-occupier home buyers,” the bank said. “Financial stability considerations would suggest that tax and regulatory frameworks should avoid encouraging over-leveraging into property, whether by owner-occupiers or investors.”
This is a pretty sensible stance from the Reserve Bank. Australia’s generous tax treatment of investors has certainly complicated monetary policy considerations during a period where Australia would have benefited from looser policy.
Unfortunately, the federal government is far from sensible when it comes to negative gearing. Prime Minister Tony Abbott was on the radio earlier today spruiking a familiar lie to those who have followed the negative gearing debate.
“We are not going to fiddle with negative gearing,” Abbott said. “Because the last time a Labor Government fiddled with negative gearing, it destroyed the rental market in most of our major cities.”
Despite the hysterics of our Prime Minister, very little of that is actually true. Real rents rose somewhat in Sydney and Perth -- both markets had exceptionally low vacancy rates at that time -- but fell in the other major capital cities.
In other words, the removal of negative gearing had an ambiguous effect on real rents. This is precisely what I argued in an article last month (The housing rort that hits all Australians, June 29).
I would like to give Abbott the benefit of the doubt on this issue but it seems hard to believe that neither he nor his key advisers are aware of the facts during that episode. That he chooses to ignore those facts to the detriment of the Australian economy is disappointing.
The Reserve Bank lends further credibility to a debate that is slowly gathering steam. It’s becoming increasingly obvious to our public servants -- and eventually the public itself -- that Australia's housing policy simply doesn’t work. It doesn’t support home ownership nor has it led to a materially rise in new construction; the only thing it has achieved is the dubious distinction of enriching one generation of Australians at the expense of another.