Saul Eslake slams Australian housing policy

ScreenHunter_924 Jan. 20 12.17

By Leith van Onselen

The AFR is today reporting that Saul Eslake, who has held multiple chief economist roles at various banks, as well as acted on the National Housing Supply Council, has provided a personal submission to a Senate Inquiry into Affordable Housing.  The submission, entitled ‘50 years of failure’, provides a damning assessment of Australian housing policy, claiming that government self interest has led to the worst affordability problem since the end of World War II:

“Politics – more than any other single factor – means that Australians are likely to have to live with a dysfunctional housing system for a long time yet to come,” Mr Eslake said.

Government policies including cash assistance to first-time home buyers and negative gearing had only served to inflate the demand for housing whilst doing next to nothing to increase the supply and therefore made affordability worse, he said…

While political parties and governments professed to care about first home buyers, the reality was that they preferred to garner the votes of the 5.8 million households who sought policies that would increase house values.

Presumably, Mr Eslake’s submission to the Senate Inquiry is the same one as presented to the 122nd Annual Henry George Commemorative Dinner, hosted by Prosper Australia, last September. This presentation was summarised on this blog, and below are extracts taken directly from that post explaining Eslake’s position.


Consider the next chart showing how the home ownership rate has decreased over the past 50 years, despite the massive decline in interest rates and subsidies to first home buyers (FHBs):

ScreenHunter_39 Sep. 03 10.37

Moreover, home ownership has fallen across all age cohorts, although the decline has been particularly severe amongst younger cohorts:

ScreenHunter_40 Sep. 03 10.40

According to Eslake:

…the decline in home ownership has been even more pronounced when one ‘looks through’ the effects of the ageing of the population, which (among other things) means that an increasing proportion of the population is within age groups where home ownership rates are always (and for obvious reasons) higher than in younger age cohorts…

Research by Judy Yates of the University of NSW shows that home ownership rates among younger age groups declined dramatically between the 1991 and 2011 Censuses – from 56% to 47% among 25-34 year olds; from 75% to 64% among 35-44 year olds; from 81% to 73% among 45-54 year olds; and 84% to 79% among those over 55…

This is also evident in the fact that home owners are taking longer to pay off their mortgages. According to the ABS’ just-released Survey of Housing Occupancy and Costs (ABS 2013b), only 45.8% of home-owning households owned their home outright in 2011-12, compared with 58.5% in 1994-95.

Eslake also showed how the supply of housing has become increasingly constipated since the 1990s in the face of rising demand, in concert with urban containment policies by Australia’s various state and territory governments:

…between 1976 and 1991, the housing stock increased at a much faster rate – 41% – than the population – 23% – although only 9% of dwelling completions during this period were by the public sector.

But the relationship between growth in the housing stock and population growth began to change after the early 1990s. Between 1991 and 2001, Australia’s population grew by 11.5%, while the housing stock grew by only 18.3% – less than 9 pc points more than the population.

And between 2001 and 2011, while the population grew by 15.9%, the housing stock grew by only 15.2%. That is, over the past decade, the housing stock has grown at a slower rate than the population – for the first time since the end of World War II.

This gradual narrowing in the ‘gap’ between the growth rate of the housing stock and that of the population – to the point of eliminating it entirely over the past decade – has come in the face of demographic trends that would have warranted a widening of this gap:

  • average family sizes declined between the early 1960s and the early 1990s, implying that more dwellings are required to accommodate the same number of people;
  • family breakdowns have meant that more dwellings are required to accommodate the same number of people; and
  • population ageing has resulted in more people living alone, again increasing the number of dwellings required to accommodate the same number of people.

Yet, in the face of these ongoing trends, the average number of people per dwelling actually rose (from 2.61 to 2.64) between the 2006 and 2011 Censuses – for the first time in at least 100 years (since the first Commonwealth Census was conducted in 1911 – see Chart 3). From 1911 to 2006, the average number of people per dwelling had fallen from 4.52 to 2.61. It would seem that the widespread angst among ‘baby boomer’ parents about how difficult it is to get their 20- (and in some cases 30-) something children out of the family home has a sound basis in fact.

ScreenHunter_41 Sep. 03 10.49

Eslake puts the recent failure of housing supply to keep up with demand down to two main factors, namely:

  • The decline in the provision of social housing; and
  • Restrictive state and local government planning schemes and upfront charging for development and infrastructure.

Eslake is particularly scathing of policies that boost demand, such as FHB Grants and negative gearing.

FHB Grants began in the 1960s and have been cancelled and then re-introduced a number of times ever since. According to Eslake, governments have spent a total of around $22.5 billion in grants in 2010-11 values over the past 50 years, yet homewonership rates have not increased over this period. They provide minimal benefit to FHBs, acting to inflate values for the benefit of vendors. In this regard, they have been a massive failure, although the recent shift towards newly constructed dwellings is a significant policy improvement.

ScreenHunter_42 Sep. 03 11.01

On negative gearing, Eslake noted that it has “actually exacerbated the mis-match between the demand for and the supply of housing, as well as having distorted the allocation of capital, and undermined the equity and integrity of the income tax system”.

Australia is one of only a few developed nations that allow negative gearing, which was made all the worse by the Howard Government’s 1999 decision to tax capital gains at half the rate applicable to other income (instead of taxing inflation-adjusted capital gains at a taxpayer’s full marginal rate). Thus negative gearing became “a vehicle for permanently reducing, as well as deferring, personal tax liabilities. And the availability of depreciation on buildings adds to the way in which ‘negative gearing’ converts ordinary income taxable at full rates into capital gains taxable at half rates”. As such, it has also become increasing popular:

ScreenHunter_43 Sep. 03 11.06

Eslake sees no policy rationale for negative gearing. It costs taxpayers a fortune – roughly $5 billion in revenue foregone. It does nothing to increase the supply of housing – “92% of all borrowing by residential property investors over the past decade has been for the purchase of established dwellings, as against about 72% of all borrowing by owner-occupiers”. It increases investor demand and prices. And it does nothing to improve rental availability or affordability.

As for common arguments in favour of negative gearing:

Supporters of ‘negative gearing’ argue that its abolition would lead to a ‘landlord’s strike’, driving up rents and exacerbating the existing shortage of affordable rental housing. They repeatedly point to what they allege happened when the Hawke Government abolished negative gearing (only for property investment) in 1986 – that it ‘led’ (so they say) to a surge in rents, which prompted the reintroduction of ‘negative gearing’ in 1988.

This assertion is actually not true. If the abolition of ‘negative gearing’ had led to a ‘landlord’s strike’, as proponents of ‘negative gearing’ repeatedly assert, then rents should have risen everywhere (since ‘negative gearing’ had been available everywhere). In fact, rents (as measured in the consumer price index) only rose rapidly (at double-digit rates) in Sydney and Perth – and that was because in those two cities, rental vacancy rates were unusually low (in Sydney’s case, barely above 1%) before negative gearing was abolished. In other State capitals (where vacancy rates were higher), growth in rentals was either unchanged or, in Melbourne, actually slowed (see Chart 7).

ScreenHunter_44 Sep. 03 11.12

However, notwithstanding this history, suppose that a large number of landlords were to respond to the abolition of ‘negative gearing’ by selling their properties. That would push down the prices of investment properties, making them more affordable to would-be home buyers, allowing more of them to become home-owners, and thereby reducing the demand for rental properties in almost exactly the same proportion as the reduction in the supply of them. It’s actually quite difficult to think of anything that would do more to improve affordability conditions for would-be homebuyers than the abolition of ‘negative gearing’.

Eslake also notes that there is no evidence to support the claim that negative gearing results in more rental housing being available that would otherwise be the case:

Most other ‘advanced’ economies don’t have ‘negative gearing’: yet most other countries have higher rental vacancy rates than Australia does.

ScreenHunter_45 Sep. 03 11.15

In the United States, which hasn’t allow ‘negative gearing’ since the mid-1980s, the rental vacancy rate has in the last 50 years only once been below 5% (and that was in the March quarter of 1979); in the ten years prior to the onset of the most recent recession, it has averaged 9.1% (see Chart 8 above).

Yet here in Australia, which does allow ‘negative gearing’, the rental vacancy rate has never (at least in the last 30 years) been above 5%, and in the period since ‘negative gearing’ became more attractive (as a result of the halving of the capital gains tax rate) has fallen from over 3% to less than 2%.

During that same period, rents rose at rate 0.8 percentage points per annum faster than the CPI as a whole; whereas over the preceding decade, rents rose at exactly the same rate as the CPI.

Similarly, countries which have never had ‘negative gearing’ – such as Germany, France, the Netherlands, the Nordic countries and (low-tax) Switzerland – have much larger private rental markets than Australia.

Eslake also debunked claims that removing negative gearing would create distortions in the tax system:

Some supporters of negative gearing also argue that since businesses can deduct all of the operating expenses they incur (including interest) against their profits in order to determine their taxable income, and can also ‘carry forward’ net losses incurred in any given year against profits earned in subsequent years so as to reduce the tax otherwise payable, it is only ‘fair and reasonable’ that investors should be able to do the same.

There are two flaws in this argument, in my view. First, a large part of the appeal of ‘negative gearing’ comes from the way in which it allows income which would otherwise have been taxed at the investor’s marginal rate effectively to be converted into capital gains, which are taxed at half the investor’s marginal rate. Businesses – if they are incorporated, as most businesses these days are – can’t do that. Companies aren’t eligible for the 50% discount on tax payable on gains on assets held for more than one year.

Second, while individuals are allowed to deduct expenses incurred in connection with producing investment income from their taxable income, they aren’t allowed to deduct many types of expenses incurred in producing wage and salary income.

To take an obvious example, wage and salary earners aren’t allowed to deduct the cost of travelling to and from work; nor are they allowed to deduct child care expenses.

Or, to take another example which may be an even closer analogy with ‘negative gearing’ for investment purposes, individuals aren’t allowed to deduct interest on borrowings undertaken to finance their own education as a tax deduction, even though that additional education may contribute materially to enhancing their future earnings – and even though any such additional future earnings will be taxed at that individual’s full marginal rate, as opposed to half that rate in the case of capital gains on an investment asset.

Finally, Eslake finished by offering seven key policy reforms to improve the functioning of the housing market:

The fundamental change that such a set of policies might embody would be a switch from policies which inflate the demand for housing to policies which boost the supply of housing. Such a suite of policies might include some or all of the following.

First, the abolition of all existing policies which serve only to increase the prices of existing dwellings, such as cash grants to and stamp duty exemptions for first time buyers, and ‘negative gearing’ for investors (in all assets, not just property, and if politically necessary, only for assets acquired after the date on which such a policy was announced);

Second, the redirection of the funds thereby saved (and/or the additional revenue raised) towards programs that increase the supply of housing – for example, by directly funding the construction of new dwellings (as the Rudd Government did as part of its response to the global financial crisis), or by providing some combination of grants, loans or tax incentives to induce private sector developers to increase the proportion of ‘affordable’ dwellings within their developments, whether for sale or rental;

Third, expanding or replicating programs like Western Australia’s ‘Keystart’ scheme which assist eligible people to become home owners on a ‘shared equity’ basis, with eligibility being subject to a means test, and which creates a ‘revolving fund’ as the ‘shared equity’ is returned to the State Government upon sale;

Fourth, changes to the way in which State and Territory Governments tax holdings of and transactions in land, with a view to encouraging more efficient use of it. That would include replacing stamp duty on land transfers (which are ‘bad’ taxes on many grounds, including that they discourage people from changing their dwellings as their needs change) with more broadly-based land taxes (ie, no exemptions for owner-occupiers, but with appropriate transitional provisions) and possibly higher rates for undeveloped vacant land in established urban areas;

Fifth, taking a more ‘holistic’ view of urban infrastructure investment, by recognizing that it has an important housing dimension – that is, that public (or private) investment in transport infrastructure (both public transport and roads) can make a tangible contribution towards improving housing supply and affordability by making ‘greenfields’ developments more accessible to both buyers and renters – and considering funding such infrastructure by levies on the increments to the value of the land which result from such investments (as for example with the levy that funded the Melbourne Underground Rail Loop Authority in the 1970s and early 1980s);

Sixth, revisiting current models for financing the provision of infrastructure and services in ‘greenfields’ housing estates with a view to reducing the extent to which these are funded by ‘upfront’ charges (something which could be assisted by changes to the land tax regime which I mentioned a moment ago); and

Seventh, reducing the cost, complexity and regulatory uncertainty associated with ‘brownfields’ and ‘infill’ developments in established areas – which doesn’t have to mean traducing the property rights of other property owners, but which should mean clearer and more uniform planning rules, with fewer opportunities for frivolous or vexatious objections and appeals.

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49 Responses to “ “Saul Eslake slams Australian housing policy”

  1. russellsmith55 says:

    Eminently sensible; it will therefore be ignored and swept under the rug post-haste.

  2. General Disarray says:

    Great work, Mr Eslake.

  3. aj. says:

    We now have sensational work from erudite non-mainstream and mainstream economists addressing the housing problem and yet we hear nothing from our politicians in respect to a problem that is like festering boil on our nose.

    Not a peep, not an open discussion, nothing?

    Why is that?

    • Nudge says:

      Towing back the boats AJ – Far more important than this utter slackjawed drivel! ;)

      Thanks for stepping up Saul! We need a lot more critical, clear thinkers like you! Where are they?

    • donaldp says:

      As a housing policy professional for 30 years, it is clear to me why the policies are as they are. Only Paul Keating had the guts to pursue the big picture over the shorter term interests of aspiring first home owners, their parents and negative gearers by questioning negative gearing. And he got a kicking.
      One graph shows the huge growth in home ownership form 1947 to 1961. This also corresponded to a huge growth in public housing, much of which was then sold to ex-tenants.
      Dare I say it, divert some tax subsidy welfare from the richer half of Australians and invest this in affordable secure rental housing (managed by community housing providers) for the less well off. Housing supply will increase, more building and related jobs, less housing related financial and living stress, greater productivity and wealth creation for all.
      Start by targeting negative gearing only to new construction and major refurbishment at the affordable sector of the market.

  4. saintmatthew says:

    the first of his policy reforms might make it through – just like they pulled up the free education ladder after themselves, the boomers just might accept making do with two or more properties if the ones behind them can’t have it

  5. lloydie says:

    What do you think?

    Quarantine all existing negatively geared properties. Allow negative gearing only on new builds.

    On sale of existing investment property, negative gearing benefits are lost. All losses to be carried forward to offset capital gains.

    That should fix supply.

    • ponzoid says:

      I think good idea, but quarantine limit of 5 years. New build only.
      Bail speculators, bail.
      Also, time to nominate Saul E as next Minister for Housing.
      I know that department no longer exists, wiped out by Labor after the Plebersek goosed prices by 20% in 2010, but for any rusted-on Liberal policymaker reading this blog – think wo/man, think, when Labor had a Minister for Housing, prices leapt 20% in one year.
      That is why I am voting for Saul E for Minister for Housing.

      • Frederic Bastiat says:

        I agree Mr Ponzoid….with all of the analysis of what went wrong with Labor, no one ever looks at how much they screwed over the working class / vulnerable / young of this country with their hpyocritical housing policy of First Vendors Grant boost.

        For that reason alone, I will never ever listen to a word Pilbersek says…she is a total fraud!

    • wycx says:

      Why leave it at new builds?

      Why not only good quality new builds? Set some standard that we want to see in new housing, and you only get 100% negative gearing if you meet the standard.

      In this manner buildings with no insulation, no eaves, no thought to solar orientation, and the cheapest, most inefficient heating and cooling would not qualify.

      If we are going to have negative gearing, at least use it to get the best possible outcome.

      • lloydie says:

        Good idea. And raise land taxes on dwellings unoccupied for more than 6 months.

      • Bubbley says:

        I’d also like to add Super Funds to the investors who can only buy new property.

        They are currently buying existing property forcing out many first home buyers. A FHB can not compete with a fifty year olds twenty years of enforced saving in the form of their self managed super fund.

  6. Sleepyu says:

    “negative gearing – it increases investor demand and prices. And it does nothing to improve rental availability or affordability.” – But doesn’t it increase rental availability in that there are more dwellings used for rent (though at the expense of owner occupies) or is the argument that as the majority of negatively gear properties are pre-existing housing it does nothing (or very little) to add to the overall supply and just substitutes would be owner occupiers into renters

    • The Patrician says:

      No and Yes.

      “92% of all borrowing by residential property investors over the past decade has been for the purchase of established dwellings”

      • Labrynth says:

        It has increased the number of dwellings to rent but not the actual number of dwellings. Negative Gearing just changes the status of an owner occupier property into an investor one.

    • hamish says:

      As per Labrynth’s comment, because it adds little to the stock, it effectively forces some would be purchasers into remaining tenants, who some landlords, if the comments sections of newspapers etc are anything to go by, will then have the gall to heap scorn upon for being loser tenants…

  7. mine-otour in a china shop says:

    Excellent conclusions reached by a strong evidence base rather than the rubbish spun around the mainstream press.

    It was on holiday playing Monopoly with the kids that I realised the strong similarities with the Australian housing market. The inventors of the game had great foresight.

    He who is cashed up most buys more property and wins, there is an endless supply of money from somebody acting as banker who is already involved in the game and is regulated with a light touch, there is a restricted supply of properties on the board, subsidies are handed out every time you pass go, there is no taxpayer payments necessary, public utilities are sold off below cost, those without houses fail etc….

    At that stage I poured a large glass of wine and wondered if I could invent another version of monopoly which shows the other side of the drop in prices, a banking crisis, attempts to hold on to your property and showcasing a firesale of investment properties …..

    • Frederic Bastiat says:

      If you look closely too, the rules of the Monopoly say “The Bank Never Runs Out of Money”…Im serious

  8. ponzoid says:

    Yes sleepyu, second part is correct.
    Most investor debt is used to outbid FHBs/upgraders, new build is about 8% of loans.
    Other taxpayers fund this nonsense.
    “Reserve Bank of Australia (RBA) data clearly shows that the overwhelming majority of investors – over 90% – buy pre-existing dwellings, not new dwellings, and . . . investors buying new dwellings has fallen spectacularly since negative gearing was re-introduced in September 1987”
    *see Chart of Investment Property Loans at:

  9. Turnitup says:

    So our tax system favours the rich…. Who’d have thunk it? Expect the gap between rich & poor to accelerate faster and faster while good people continue to sit idle….

    • DMc says:

      “So our tax system favours the rich”
      Not sure how you reached that conclusion.
      It does appear to favour those that borrow to invest, but you don’t need to be rich to do that.

      • ArchCC says:

        “Not sure how you reached that conclusion.”

        The greatest tax benefits from NGing accumulate to those on the highest incomes with the most wealth tied up in NG’d property.

      • DMc says:

        Ahhh… the good old, “you pay 40 cents and get 20 cents back, while I pay 20 cents and get 10 cents back, so you’re getting more of a benefit than me,” argument.
        Yes, negative gearing is more beneficial to high income earners than to low income earners. That’s true. Any allowable deduction will do the same – you could say that allowing deductions for charitable donations benefits high income earners – but to conclude that the tax system as a whole favours the rich is a bit of a stretch.

      • aj. says:

        Totally wrong DMc – it does favour the rich because it favours capital over labour, as capital gains are sheltered but labour gains are taxed immediately. This can be arbitraged to ensure gearing losses on capital can be used to shelter labour earnings.

        Here’s an example. Young Chappy from a wealthy family earning 200K a year has a healthy capital base. He decides he’d rather shelter his income so his 10mil gearing (based on 4mil capital) generates about 300K a year in deductions. He pays no income tax and his assets can accumulate wealth tax free until he is ready to realise gains (or as is usually the case offset strategically gains against losses). That 10 mil might be a big house, a share portfolio and some other commercial capital assets. Young Chappy owns his own home does not pay income tax (he may in the future but not if he’s careful), and his parents paid his uni costs. He may be capitalising the gearing losses so there is no impact on his cash-flow.

        Young Chappy also is a beneficiary of a family trust, the family trust can skirt the derivation provisions usual to taxation to suit the person who can receive income in the most beneficial way. As young Chappy has deductions to burn from his leverage he may take a greater slice of tax-free income from the trust. He will probably share this with his family under the table, particularly younger Chappy who at this stage is not geared so heavily.

        Young Lass is from an average family, she works hard and earns 250K a year. But she has no capital, so her ability to gear to shelter income is limited by both capital and the risk of very high leverage. She is also trying to buy a home as well, and put her kids through school. Young Lass is fully exposed to the tax system and pays about 85K tax plus any uni debt she accumulated. Young Lass’ after-tax earnings are less than young Chappy.

      • DMc says:

        “Totally wrong DMc – it does favour the rich because it favours capital over labour, as capital gains are sheltered but labour gains are taxed immediately.”
        It’s only “sheltered” until a capital gain event occurs, it’s not sheltered for all of eternity.

        “This can be arbitraged to ensure gearing losses on capital can be used to shelter labour earnings.”
        Yes, that’s negative gearing – something available to all and useful for both the rich and those on moderate incomes.

        “Here’s an example. Young Chappy from a wealthy family earning 200K a year has a healthy capital base. He decides he’d rather shelter his income so his 10mil gearing (based on 4mil capital) generates about 300K a year in deductions. He pays no income tax and his assets can accumulate wealth tax free until he is ready to realise gains (or as is usually the case offset strategically gains against losses).”
        That’s theoretically possible, but you haven’t yet mentioned that Young Chappy now has zero money to live with. No money for food. No money for a car. No money for medical expenses. Young Chappy doesn’t exactly seem to be living the high life. Not only that, but with $200k income and $300k deductions, he must be finding $100k in the couch each each year to support his cash-flow negative investments. But let’s go on…

        “That 10 mil might be a big house, a share portfolio and some other commercial capital assets. Young Chappy owns his own home does not pay income tax…”
        Like I said, theoretically possible if you have zero living expenses.

        “…(he may in the future but not if he’s careful)…”
        This is a ridiculous statement. The capital gain will be taxed at some point.

        “…and his parents paid his uni costs.”
        Irrelevant to a discussion on tax and housing.

        “He may be capitalising the gearing losses so there is no impact on his cash-flow.”
        Possible, so he wouldn’t need that big couch, at least to begin with (other than for his living expenses). But interest on the capitalised interest is not deductible, so he would be reducing his tax-deductibility over time (not to mention increasing his total debt). His position would worsen each year.

        “Young Chappy also is a beneficiary of a family trust, the family trust can skirt the derivation provisions usual to taxation to suit the person who can receive income in the most beneficial way. As young Chappy has deductions to burn from his leverage he may take a greater slice of tax-free income from the trust. He will probably share this with his family under the table, particularly younger Chappy who at this stage is not geared so heavily.”
        This only works because Young Chappy is taking money from the trust while at the same time increasing his personal debt (through capitalising interest). Young Chappy and his family have a seemingly good setup this year but the piper must be paid some time, and Young Chappy is buidling nothing but a debt that is growing exponentially as interest on capitalised interest grows and his deductibility steadily decreases. Also keep in mind that the capitalised interest will not contribute to Young Chappy’s cost base when he realises his capital gain, so his investment will need to make a gain equal to the capitalised interest (and interest on interest) PLUS the tax payable on a gain equal to the interest before he will see any return on his investment. At a 6% interest rate and 40% tax rate with 50% CGT discount, he needs 7.5% growth just to cover his growing debt and the eventual capital gains tax. Also keep in mind that although he will receive the 50% CGT discount, Young Chappy is pushing all his income into a single year (when he sells that $10mill house). He will receive the benefit of the tax-free threshold and lower tax brackets only once, with the majority of his 1-off pay-out sitting in the top tax bracket.

        “Young Lass is from an average family, she works hard and earns 250K a year. But she has no capital, so her ability to gear to shelter income is limited by both capital and the risk of very high leverage.”
        At 250k per year, Young Lass would be able to raise some capital pretty quickly and could service a large loan to get virtually the same negative gearing benefits available to Young Chappy. The only reason Young Chappy can get a larger loan is because he is willing and able to risk a larger up-front deposit, and the doomsayers on this site will tell you even real estate has considerable risk. Risk/reward is a basic principle of the economy.

        “She is also trying to buy a home as well, and put her kids through school.”
        Who’s putting Young Chappy’s kids through school? He certainly can’t with the cash flow you detailed.

        “Young Lass is fully exposed to the tax system and pays about 85K tax …”
        Yes, Young Lass pays tax because she has an income. Young Chappy pays no tax (this year) because his living expenses are being funded by an increasing debt, so he has no net income. Young Lass doesn’t have an increasing debt, so who’s the real winner?

        “…plus any uni debt she accumulated.”
        At $250k salary, her HECS/HELP debt would be gone in a year or two. Not bad for an otherwise free university course.

        “Young Lass’ after-tax earnings are less than young Chappy.”
        No, they’re not. Young Chappy has zero after-tax earnings in your far-fetched scenario. His income and the money he takes from the family trust is offset by his deductible losses on the investment. His net cash flow is zero when the capitalised interest is considered. I could take out a $100k loan and pay zero tax and say, “I got $100k tax free”. Your scenario is a little more difficult to see through due it’s complexity, but it is essentially the same.

        Young Chappy is not winning here, he is only delaying the inevitable by funding his lifestyle through increasing debt. No person in their right mind would follow this strategy.

        Your one valid point that I can see is that the CGT discount favours capital over labour. What you don’t seem to have considered is that this requires Young Chappy to have all of his capital tied-up in ways that are of no benefit to him day-to-day, and there must be capital tied up in the trust to generate the income he is taking from it. That capital is being put to use, at not insignificant risk of loss. This is what the tax system wants to, and should, encourage – the wealthy making their capital available for productive purposes. The problem is that residential property is considered just as productive (from a tax perspective) as any other capital investment and this is a flaw that should be rectified, but it’s not a benefit available to the rich any more than to those on moderate incomes.

      • aj. says:

        Gave that rubbish from you an answer DMc but it looks like it was lost in the ether.

        Mate that’s garbage – these are real examples and tax shelters matter. Can’t be bothered rewriting but it’s pretty easy to capitalise leverage without impacting cash flow, and to say leverage risk is the same for someone 100% leveraged to 10mil and someone 60% leveraged to 10mil is dumb.

        Capital and labour are not treated equally – that’s just the way it is. I try to keep my effective tax rate below 5% – I can do this legally via gearing outright asset ownership and regulating my income. Someone trying to save for a house could not do this.

      • aj. says:

        Should add that the entire basis of your case is that leverage risk is equal regardless of capital base ie overall leverage, and that interest cannot be capitalised behind sheltered gains without impacting cash flow – both totally false.

        Capital is favoured – but it doesn’t stop the whining of the capital favoured – they live in a relative world. Sucks to not have a nice house in syd and a Porsche eh?

      • DMc says:

        aj, given how ridiculous your “Young Chappy” example was and how easily it was shown to be an unsustainable strategy, I simply don’t believe you when you say that you keep your effective tax rate to 5%. If you have income that is not funded through increasing debt and is not being used to support cash-flow-negative investments, you will pay tax on that income. It’s as simple as that. If you personally have significant income that you are using for non-deductible purposes and are paying only 5% tax on that, you are probably acting outside of the law.

        My case has nothing to do with risk being equal regardless of leverage level, because it isn’t equal (and I never said it was). Both upside and downside risk is amplified. My case DOES have to do with the fact that if you are drawing a net income from somewhere, whether it be through labour or earnings on capital, that income will be taxed. Earnings on capital are taxed at a lower rate to encourage investment and the productive use of capital, and also to recognise the time-value of money. My second point is that negative gearing is available to, and used by, people on even moderate incomes, so it is not a measure that favours the rich.

        If your gripe is that the rich have more money to invest, so can make larger profits with lower risk then that’s something you are going to have to get over because it is a fundamental characteristic of a free-market economy and it has nothing to do with taxation.

    • flyingfox says:

      Would be true for the US, definitely not here …

  10. Frederic Bastiat says:

    That rental vacancy rate comparison between US and Oz is amazing….it totally hammers home the restrictive land release that goes on across Australia.

    Surely the Housing Ministers of each State should have a clear policy to follow when deciding upon total amount of land released for residential housing:
    - price stability
    - range % for rental vacancy rates
    - Housing price growth etc…

    At the moment, their is no transparent or logical framework…their housing Minister’s arent even the ones that make the announcement that they are cutting back land release! Its the damn Treasurer!

    • gonderb says:

      It’s also reflective of how centralised / city-focussed our economy is (with respect to where the jobs are) compared to the US, which is far more de-centralised.

  11. gonderb says:

    It’s a pretty good paper, because it is extremely well researched and fact based wrt all data presented. Presents arguments for reform in a non-emotive and reasoned manner.

  12. The Patrician says:

    Saul’s submission would benefit from the inclusion of your “Percentage of residential property investment in new/existing dwellings” chart

  13. cancerward says:

    There are currently five submissions at

    Eslake’s is Number 2.

    Number 4 (anonymous) also comes out against negative gearing and in favour of land taxes.

    Number 5 from Home Loan Experts (Otto Dargan) says “Negative gearing should not be abolished”.

  14. PhilBest says:

    I wonder if there is any chance of getting Aussie policy makers to pay any attention to this NZ advocacy of reform of housing supply:

    Just as an added component to the many good ideas for reform of tax treatment etc

  15. pungame99 says:

    First real estate agent told me yesterday not to buy now as market is too hot and wait for another year.

    I am still wondering why he said so….

    Are NG or housing policy changes coming????

  16. Stomper says:

    +Standing ovation Saul

  17. Hugh Pavletich says:

    Congratulations Saul Eslake.

    Hugh Pavletich

  18. Wing Nut says:

    Thank you Mr Eslake, noted. Next submission please.

  19. bruce g says:

    All excellent points by Saul. However, is it conflict of interest that he didn’t address the role of central banks and lenders in highly damaging asset price inflation over the last 15 years? Why is it Australia needs to run higher interest rates to attract ever more foreign investment, of which a higher % went towards inflating house prices over the last 15 years? Why is it that the RBA and Treasury don’t acknowledge borrowing foreign funds to inflate house prices damages GDP. The RBA’s credit to GDP ratio reveals more clearly than any other metric that Australia’s unprecedented private borrowing has surpassed GDP growth at an astounding rate. The only way this can happen is if credit is used for non productive purposes, like investing in (existing) dwellings subject to higher demand/supply. And yet the whole time this ratio was rising, our lord and masters sold the big fat lie that higher credit was primarily for mining and infrastructure. The state of the Australian economy is a reflection of the deterioration of ethics and values over the last 40 years.