Saul Eslake: 50 years of housing policy failure

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By Leith van Onselen

I had the good fortune on Monday night to attend the 122nd Annual Henry George Commemorative Dinner hosted by Prosper Australia.

This year’s guest speaker was Saul Eslake, who has held multiple chief economist roles at various banks, as well as acted on the National Housing Supply Council. Eslake’s presentation was entitled 50 Years of Housing Policy Failure, and tackled the myriad of demand and supply-side policies causing Australia’s housing market to operate in a dysfunctional manner.

Some of Eslake’s slides are particularly revealing. 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):

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

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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.

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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.

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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:

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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).

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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.

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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.

Overall, a top presentation from an Australian living legend.

Powerpoint Presentation below.

Saul Eslake – Henry George Dinner Sep 2013 (Slides)

Unconventional Economist


  1. This is such a great analysis it’s hard to pick one part to praise, but this point is so salient:

    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”.

    The ability to gear highly with little risk of a margin call has allowed those with capital (and access to cheap debt under the new financial repression) to shelter income from tax in a way that has completely corroded any trust in the equity of the tax transfer system.

  2. Yeap… but this makes too much sense.

    Besides you can’t win votes with … with … with *this*! Won’t someone please think of the “mums and dads investors” who already bought overpriced dog sh*t-boxes on the promise that CG is the path to riches?

    Sorry – I’ve been up since 3:00 am – my brane’s not what it used to be.

    • Don’t worry I’m sure the pollies have the mum and dad specufestors front and centre as evidenced by their non- existent housing policies.

      Vote Family First – at least they might make some noise about land supply.

  3. If i remember mr Eslake is also an advocate for massive immigration, not sure what good it does to young Aussie FHB with the current building rate and CBD setup

    • Immigrants have no negative effect whatsoever on FHB’s when the supply of housing is elastic enough.

      It makes a world of difference to your economy if immigrants are required to pay tribute to the local property Ponzi, or whether whatever spare cash they have is actually spent on something productive like building an actual house, starting a business, doing more discretionary spending.

      • What elasticity can you get when most immigrants flock to only two cities there is a limit how far you can extend the boundaries and the CBD/already built is not elestic

      • Nonsense you could build unimpeded all the way from Melbourne CBD to Ballarat if you wanted to, and even in regards to Sydney, where there are a few more natural barriers, hop in a plan and fly over it – there is enough infill available to easily fit as many people in the Sydney basin again.

  4. TheRedEconomistMEMBER

    What are the chances this research making it into the main stream media this week?

    All I have heard this morning both in Print and Radio..

    – Sydney prices up 5.4% in last quarter
    – Average Home loan now at $505K due to increase dwelling price. (no real mention of historically low interest rates or investor demand as the cause)

  5. Excellent article. Good to see more mainstream economists recognising that the black hole of housing debt is massively distorting our economy and competitiveness.

  6. He is still nowhere near focused enough on “planning gain”. Nothing he advocates, is a guarantee of a reduction in the grip of oligopoly powers of “holdout” on the part of the owners of zoned land.

    • Funny you should say that Phil. In the Q&A session, I asked Saul why he didn’t advocate more strongly the elimination of restrictions on land supply (e.g. UGBs), given they hand monopoly-style power to lucky landowners with zoning approval. He was a bit cautious in his response, but agreed it was an issue.

      It was my only point of disagreement is his whole presentation. That is, he should be advocating more strongly for greater competition and contestibility in urban land markets.

      • Great piece Leith,
        Gives some hope for the future.
        In the Q&A did Saul give any insight to his expectations for LNP housing policy?

      • This has always been an indicator of the prevailing “morals” in society.

        There was a time when the 5 million would have actually cared about giving the next generation a fair go, just as they themselves were given a fair go.

  7. Great article. It is so sad that Australia’s housing policy is such a failure but no-one wants to touch it. And l dont think any major political party will. It makes me think that our property market is so precarious that any fiddling no matter how small will bring the whole thing crumbling down. A US style property crash in Australia would decimate us with all that investor activity. If a property crash did happen, investors will cry “how could you let it happen?”. I believe it will only be then that our government will take an honest look at our housing policy. I hope for this property reset, not because l want to see 1.1 million landlords burned, but so our children and grandchildren have a chance at home ownership and an equitable playing field.

    • That’s a good description of the situation. The “how could you let it happen” is gold and I think that’s exactly why they’ll do everything they can to keep the debt flowing and house prices increasing. Any crash or reset will only come despite the incessant attempts of the politicians to keep the bubble inflated.

    • “…so precarious that any fiddling no matter how small will bring the whole thing crumbling down.”

      That’s why they don’t want to touch it.

  8. Perhaps our battler property entrepreneurs, tut tutting at over-spending socialist governments and their entitlement addled citizenry, will steel themselves for their own austerity medicine – a removal of negative gearing. And perhaps our banking Dons, chastising government for their profligacy and disrespect for taxpayers, will relinquish their expectations for government support and chide their own greedy stakeholders over unsustainable profit expectations.

    I have no doubt that these groups will be more than happy to set an example, but given their inherent lack of presumption, are just waiting timidly for a responsible government to implement the appropriate measures.

  9. The obvious factor missing from this thoroughly conventional analysis is the role of “positional goods” in the context of government-based rent-seeking under the Westminster system.

    The questions which any comprehensive model of Australian settlement must answer are:

    a) why is Australia’s population so heavily concentrated in the state and territory capitals?

    b) why has this settlement pattern persisted (and intensified) over time despite the acknowledged high costs of the state and territory capitals and despite widely changing economic circumstances which might have been expected to see a move in the opposite direction?

    c) why have towns like Newcastle or Mackay – which serve prosperous hinterlands – never grown into major metropolises?

    d) why are similar patterns of political capital dominance seen in places like London, but not in the United States?

    For those willing to step outside the square and consider alternative models, the role of political capital positional goods must also be considered as a contributing factor.

    Under the Westminster system of “elective dictatorship” the Cabinet has a monopoly on executive and legislative power. Consequently, the Cabinet is the fountainhead of rents. Anyone aspiring to be a primary rent-seeker needs to live within “lunching distance” of the Cabinet. Secondary rent-seekers need to live within proximity of the primaries. Tertiary rent-seekers need to live within proximity of the secondaries.

    And so it grows outwards like the layers of an onion centred on the Cabinet.

    Melbourne grew under the system of government-imposed tariff protection which taxed competitive industries and regions in order to subsidise the influential industries close to the (then politically dominant) Melbourne Establishment.

    Likewise Sydney has grown and is currently sustained by the convoluted and needlessly expensive system of compulsory private superannuation which effectively acts as industry protection for the finance industry.

    Brisbane and Perth have grown and are sustained by their ability to collect mining royalties from the internationally competitive territories which they govern. (At least until the Abbott government centralises mineral royalties in order to buy votes in the bigger voting blocs of Sydney and Melbourne.)

    All of the capitals extract rents through such policies as fuel tax which act as a “distance tax” on those who live far from the metropolis. (NB how much lower fuel taxes are in the United States, where capital-city dominance is limited by constitutional separation of Legislature and Executive.)

    On the other side of the ledger, spending is concentrated in the political capitals, not only in Australia, but in other Westminster system regimes.

    For example London is the largest per capita recipient of government spending in the England, the second largest per capita recipient of government spending in the UK (after Northern Ireland), and the largest per capita recipient of spending (excluding social protection and agriculture) in the UK.

    Not surprisingly, the political capitals spend money predominantly on themselves!!

    It is not to be inferred that Australian cities exist only as positional goods for those seeking access to government-directed rents. But to the extent that capital cities are positional goods, attempts to increase the supply of access will ultimately prove futile. It is impossible to increase the supply of a positional good.

    The positional good theory suggests three quite different policies to address the problem, all of them aimed at reducing the underlying rent-seeking:

    a) reducing the rent-seeking power of the Executive through the constitutional separation of Legislature and Executive;

    b) reducing the rent-seeking power of Legislature and Executive through the introduction of Democracy (referred to by some as “direct democracy”); and

    c) reducing the extent of rent-seeking power by government in general through devolution of political power, both from the central government to the states and through division of the states into smaller autonomous cantons.

    Of course, such policies are anathema to the rent-seekers themselves and so will be comprehensively ignored.

    That cannot be prevented. It is a widely studied characteristic of human beings to reject as a reflex action any perceived threat of disconfirmation of their entrenched beliefs or any perceived threat to their self-interest.

    But such self-deception will do nothing to solve the underlying problem.

  10. So based on the comments on this and other websites from Australia I can sense that there is real concern about housing affordability in this country, but I understand we are not at critical mass to actually be addressed by the major parties.
    The major parties will never address it because they care about winning votes from the majority and unfortunately the majority are owners or investors, so is clearly on the side that wants house prices to never come down and keep the game intact.

    So even if we are a minority why is there no “Housing Affordability” party to at least try to grab a few seats ? I mean if there are so many “silly” small parties in the upcoming federal election I am sure a HA party would get some attention from the media and the public. I for one would definitely vote for a party that addresses this issue…

    • That’s not how the mathematics of voting works.

      Imagine a simplified example in which there are 10 generic issues, each of which is “most important” for 10% of the population and that they are equally divided on the other issues.

      Imagine 12 parties:

      Party A supports issues 1 to 5 and opposes 6 – 10;

      Party B opposes issues 1 to 5 and supports 6 – 10;

      Parties C to L are single-issue parties supporting each of the 10 issues.

      Supporters of Issue 1 will vote for Party A if – on balance – they prefer its position on the remaining 9 issues. Party A may be expected to receive about half of the Issue 1 supporters. The same applies for Issues 2 – 4. In total Party A may expect 25% of the vote in this way.

      Likewise, Party B may expect 25% of the vote.

      Each of the remaining 10 parties may expect on average about 5% each. They will have no effect. Under a single transferable vote system, votes for them will simply find their way to the major parties.

      In the absence of transferable votes, even voters who might find Issue 1 of most importance to themselves might still not vote for the corresponding party because it would be a vote wasted.

      This assumes that there is no collusion between the major parties. In practice, the major parties may collude with one another and with particularly well-organised lobby groups or campaign donors or other influential individuals or groups to ensure that certain policies are not offered at all.

      In light of the obvious futility of the battle and the high costs involved, even supporters of Issue 1 may not bother to organise a Party. They will confine themselves to lobbying the major parties – which is what is observed in practice.

      The system of elective government simply cannot reflect the underlying preferences of the population. Voters can only choose between the two blocs of Oligarchs who will rule them for the next three years.

      • That’s true of the House of Reps (and lower houses in most states), but the Senate is definately kinder to small parties. It’s not inconceivable that a housing affordability party could win a senate seat.

      • Where does this rubbish come from about Greens having the best housing policy?

        1) Increase inner-urban density

        it’s the forced zoning that causes consumers to be captive to developers and those seeking rent through planning gain.

        This is counter-productive to affordable housing.

        2) Increase public housing stock thereby taking down private rental costs

        And how are they going to accomplish this? Buy market price housing then drop the rent?

        Private yields are already small, reducing yields again present a huge ooportunity cost.

        3) Abolish negative gearing and the 50% capital gains discount rort

        Capital gain can only come into effect if gain is present, this is a cart before the horse policy.

        Katter is the only one who has expressed explicit policy about intervening to regress the price to mean.

        Family first has also indicated they will intervene to reduce housing prices, and do so out of a moral concern, not fiscal.

        The greens a major reason why we’re here in the first place.

      • HI Rusty

        Heard the Katter rep at a Candidates debate talking about all matters Katter.

        Some great points he bought up, we need more dams in WA to jump start the economy.

        We need a new public owned bank to lend to developers to fund dams and rail.

        And the Big One we need to insist that Obama sack the head of the CIA cause he a Mormon and they have taken over the the CIA ready to take over America. Great party!!!

      • Thanks for the responses, I was thinking about the senate, like Ralph mentions, a Housing affordability Party might grab a few seats and put the issue on the agenda at least (similar to what the Greens do)

        I was having a look at this list

        and visited some of the parties’ websites…

        Seems like “Australian Stable Population Party” & “Building Australia Party” are the ones that mention it most, but do not really say how would they go about improving affordability

        As I mentioned before the name of the other parties are rather silly or not serious at all…

  11. Too late Saul Numbnuts, fair dinkum we are supposed to forgive Eslakes silence on the issue while he was chief economist for whoever it was, yeah Saul you are set for life so can afford to tell the truth rather than entrenching flawed economic theory into the publics minds as you have been doing for the last umpteenth years. DO THE WORLD A FAVOUR KILL AN ECONOMIST.

    UE – I wish I had seen this comment earlier. It is completely out of line. As a result, you have been banned from commenting for 48 hours.

    • Back in your cage there, Big Bear fella. Economists don’t actually run those banks and political agendas, they are merely the respectable front of capital markets sales teams. If you want to advocate the revolutionary slaughter of vested interests, you’re looking too far down the chain.

    • Can’t blame those like him TBH, the same goes for David Murray yesterday, they are essentially bound by prisonsers dilemma.

      I know of bankers who were staing in private in 2005 this would all blow up.

      However if in 2005, one of the 4 majors said “No, this is stupid, we’re not going tolend anymore into a housing bubble”…

      The outcome would be that major loses business and drops drastically in market share, the other 3 take market share and ‘boom’ until it all goes pear-shapred.

      So unless they can time the market, and remember REAL bankers no longer exists, they are smooth talking salesmen,not technocrats, they can’t and won’t do anything.

      it’s a lot easier for all 4 to scorch the earth in unison, they all procalim in unison ‘we didn’t see it coming’.

      Eslake probbaly mentioned inconfidential meetings at ANZ about this, but ‘commercial focus’ probably prevented it from going further than that.

      They’ve also paid off our government to firstly backstop it, then also say ‘we didn’t see it coming’.

      The only outcome is financial ruin and taxation servitude for the rest of us.

      But this is where Adam Smith’s invisible hand is important, and it’s not always passive or subconscious.

      The likes of Gerry harvey and the utterly incompetent Heather Ridout when she was with the BCA, they should have been screaming from the roof tops that any bubble, but this type of bubble more than most, is hazardous to their enduring viability.

      Lobby groups like the BCA are meant o be first and foremost an active ‘invisibile’ hand to ensure stablity, NOT seek rents.

      They didn’t and they deserve to be gone. Hopefully tis will die out sooner rather than later and we can rebuild something from the ashes with this lunacy fresh in our mind.

      But the moral of the story is bankers should have no policy input.

      Despite the rheotoric about the Gillard and Rudd government not putting feelers out for ‘consultation’, the private sector should have the input greatly reduced when it comes to policy, especially bankers.

      • So Rusty are you claiming the Nuremberg defense for those poor Econonuts earning buzzillions of dollars being the front people telling the masses come in quick before you miss-out, it’s all okay.

      • So Rusty are you claiming the Nuremberg defense for those poor Econonuts earning buzzillions of dollars being the front people telling the masses come in quick before you miss-out, it’s all okay.

        I can’t recall Eslake ever spruiking.

        What I am saying is that we incentivise guys like Murray to push volume, and then subsequently bail them out.

        We bail the banks out because the bogan boomer can’t stop consuming or cannablising their children.

        They are bound by game theory, and the way to overcome it is guarantee death to the competitors int he event of failure.

        I’ve stated plenty of times bail the banks out if you must, but that comes at the forfeiture of bank ownership by shareholders, and the mass sackings of banking managers.

        I’d also advocate the death penatly for banking CEO’s in the event of failure.

      • Well, perhaps not the death penalty, but the certainty of a significant stretch of time in an institutional environment involving communal living with a cross section of the more fringe elements of the community extracting a daily entitlement to customer-focused-full-service banking.

      • Well, perhaps not the death penalty, but the certainty of a significant stretch of time in an institutional environment involving communal living with a cross section of the more fringe elements of the community extracting a daily entitlement to customer-focused-full-service banking.

        No, I mean the death penalty.

        Banks are offered unique trading conditions, as well as being able to add to the money supply.

        These are major responsibilities, and all you have to do to succeed, is the right and honourable thing!

        The ‘right’ to life is a social construct, and I have no qualms deconstructing it for malignant bankers.

      • I think we have to be careful to balance the deconstruction of certain social contracts against the longer term requirements of the banking system to provide globally competitive incentive structures to a broad pool of banking executive talent, much of which will tend to working in non-death penalty for banker CEO jurisdictions. I think it was Mercer Consulting who did some research into this around the time of the GFC, and they found a high degree of reluctance on the part of executives currently working in financial services to move to jurisdictions where social contracts had been pared beyond the ‘right’ to not be sodomised on a regular basis by Brazilian drug mules with halitosis and Hep A. There’s a happy medium there as a society wherein we can continue to attract that pool of global banking talent, while reserving the right to extract extraordinary retribution.

    • @Bear Jew,
      You’re seriously out of order with this sort of comment, time to man-up and eat a big slice of humble pie, Saul deserves an apology.
      I’d like to believe that MB is a step above the rest of the blog sphere, but if we condone this sort of attack we become that which we detest.

  12. ‘Bear Jew’, who ever you are (not David Koch, obviously) … those who know me well know that I have been arguing against first home owner grants since 1980, and against negative gearing since the ACCI-ACOSS Tax Summit in 1996. I gave plenty of talks saying what I said on Monday night while I was with ANZ. So check your facts before you make assertions like this. And if you’re going to encourage people to commit criminal offences, have the cojones to use your real name.

    Thank you to everyone else, especially Leith, for their kind comments. I was amazed at how many people turned up on Monday night. And especially to have Max Corden in the audience, it would be like having Maynard Keynes turn up to your graduate seminar.

    • Welcome to MB Saul.

      Do you have any input into LNP housing policy/tax policy development?

      Do you see any prospect of reform from the LNP on NG or CGT on houses?

      Why don’t you advocate removing NG on existing housing only (for a start), so as to increase housing supply?

      • No, I don’t have any input into LNP policy on housing (or anything else for that matter). I do talk to some Liberals occasionally, as I do to some Labor MPs, but nothing more than that. I’m a member of the National Housing Supply Council established by the current government, but that may well be abolished by the Coalition if it wins on Saturday (as the polls suggest is highly probable); they abolished the Indicative Planning Council for the Housing Industry after the 1996 election.

        Although State Coalition Governments have abolished or reduced FHOGs for people who buy established dwellings (and good on them for that), I’d be very surprised if a federal Coalition Government did anything to narrow the scope for ‘negative gearing’. I have some sympathy for the idea of restricting the availability of NG to the purchase of new dwellings, for the reason you mention; but there might still be an equity problem in that NG would still be available for investors in other assets (such as shares, or taxi plates).

        I used to support removing the CGT exemption for owner-occupied housing, but I’ve changed my mind on that because you would then have to allow interest on owner-occupier mortgages as a deduction – and given what I think is the outlook for capital gains on housing from here, that would probably end up being revenue-negative; and it would probably also encourage people to take on even more debt, which I don’t think is something public policy should do.

      • It’s not a problem for the majority of people if they don’t have a realistic prospect of access to affordable taxi plates or CBA shares. I’m sure we, as a nation, have the collective flexibility of imagination to countenance the necessity for some differentiation between housing, shares and taxi plates in terms of their value as social goods. If removing NG on established housing creates an ‘equity’ problem, then so be it. Make the case for why this is a reasonable inconsistency. We are not so primarily concerned with creating ‘equity’ in the tax treatment of asset classes that we allow people to purchase their principal place of residence through their super fund.

      • I used to support removing the CGT exemption for owner-occupied housing, but I’ve changed my mind on that because you would then have to allow interest on owner-occupier mortgages as a deduction […]
        Not sure I follow that – why ?

      • @DrS – generally if you are going to tax gains then it is appropriate to allow a symmetrical deduction of expenses. The ITA Acts are structurally designed around this point.

        The legislature could enact a new set of provisions for taxation and denial of deductions but it would go against very well established taxation principles.

      • @DrS – generally if you are going to tax gains then it is appropriate to allow a symmetrical deduction of expenses. The ITA Acts are structurally designed around this point.
        Still not sure I get it. The logic would seem to dictate that I should be able to, say, tax-deduct the interest on a car loan in case my car becomes a collector’s item and sells for more than I bought it for.

        If I borrow money to buy a bar of gold, is the interest on that tax-deductible ?

      • @DrS – for capital gains the interest expense will form part of the cost base when determining the taxable gain. The interest on the gold is deductible, just not against current income, but rather against the gain on the asset.

        edit – incidentally if it wasn’t for the politicisation of the ATO’s approach to neg gearing it is likely that most property investors, which are actually asset speculators, would find that interest expense should be treated similarly.

      • @DrS – for capital gains the interest expense will form part of the cost base when determining the taxable gain. The interest on the gold is deductible, just not against current income, but rather against the gain on the asset.
        That sounds more reasonable. So why couldn’t it be done with home loans without (apparently) significant changes ?

      • The interest on the gold is deductible, just not against current income, but rather against the gain on the asset.

        This is the way it should be for housing. I’m also confused Dr S, why is this not possible

      • Well there is no reason why housing couldn’t be treated like this. Although i think in the jurisdictions that allow deductions for mortgage payments they actually treat it like you are paying rent to yourself so it is more revenue than capital in nature.

        Certainly if the primary residence was treated this way (capital) then it would be much harder to justify a rental property as being given a separate treatment (revenue).

        I’d actually really like to see a case run by the ATO against a property investor attempting to treat interest on revenue – it is clear that many of these investments will never be cash positive and rely solely on the capital gain to ever be a profitable investment. They are strictly asset speculation with the income component existing in form not substance. The ATO really is turning a blind eye on this one.

        And this really does lead to even more corrosion of the trust in the tax system – the tax system rapes and pillages PAYG workers without much capital and gives an express lane to those with capital.

  13. Considering some 16% of taxpayers are now landlords, I can’t see making changes to NG getting through parliament. Just look at the car FBT changes and the howls of protest over it and I think the number of people affected was at least half of those who’d be affected by NG removal.

    It’s scary to see that around 65% of landlords lose money each year.

    NG should only be for newly created assets ie newly constructed housing / commercial property, newly listed shares. By allowing it on existing assets it does nothing to help create new wealth via asset formation.

    But hey, what’s $5B a year in Govt revenue lost to the program.

    • As flawse likes to say – ‘the answers lie back in time’. The investor genie is not going back in the bottle anytime soon.

      I think the best path for the new property excluded classes is to become much more activist through rental unions, litigious action against landlords and perhaps even some kind of civil disobedience with respect to landlord assets (as suits an individual’s morality and ethics).

      Being a landlord needs to be made to be a very expensive and tough responsibility and one that should not be taken on lightly.

    • Considering some 16% of taxpayers are now landlords, I can’t see making changes to NG getting through parliament.

      So true. Only 10% of us use any goods and services, yet they had a hell of a time getting the GST through parliament.

      That’s one of the things I love about Australia. Taxes never go up because voters simply don’t allow it.

  14. To add to Aj point above its always amused me how NG in relation to the ITAA is a bit like cart before horse, eg I have spent too much for my meagre income so I’m allowed to offset loss against other sources? Whereas mostly in ITAA i’m allowed a deduction necessarily incurred in earning assessable income ie other way around. Also why do we have non commercial losses legislation for taxpayers in early years of start up but don’t apply this to NG? And nearly all NG is never going to make a profit on revenue account so why are deductions actually allowable unless only allowable on capital account. Its pretty hard to argue NG will ever be revenue positive so why is it even allowable under ITAA within even the current interpretations of ITAA? Its only allowed ’cause its not challenged by Tax Man. First up why not treat it the same as non commercial losses & also make it on capital account & not revenue. It only gets sold to the punters as ultimately being on capital account anyway so why doesn’t tax man make assessments based on capital account in first place?

    • That’s right Sool – it was concerning enough that the tax base was eroded by business investments in early phase non-commercial activities that the the non-commercial provisions were introduced. The fact that the ATO probably doesn’t even need these provisions to stop the non-commercial neg gearing that should be on capital account but turns a political blind eye is pretty ordinary.

      If the ATO wonders why there is a dearth of respect for the tax-transfer system, they only have to look at how they have applied double standards to those fortunate enough to have a ready supply of capital to shelter other income.

      No matter what analysis of the tax system you read integrity resulting from equity is a key aspect to a functioning system. My parents wanted to pay tax and felt it was their duty – i’ve seen first hand the rorts, tricks and double standards that give one rule for the wealthy and another for the PAYG mug and i’m never ever paying a bean more than i have to – and have actually made decisions in my life to earn less money rather than pay more tax, where i considered the balance of work to taxation was skewed.

      The Australian taxation system is far more generous to capital than it is to labour and certainly favours those with the money to put in place and defend the structures that can keep it low.

  15. Any changes to negative gearing are highly unlikely – even something minor, fiddling around the edges, like only allowing NG for new investments in new property just will not happen.

    One thing I don’t expect from an Abbott government is innovation in relation to long standing economic policy – Abbott is more a conservative than Howard and that should tell you all you need to know.

    IMHO the NG debate is an distraction that will simply attract opposition to ANY reform of the housing market.

    Policies to expand supply (including government building and then selling) are the best way to put downward pressure on new house prices and eventually existing house prices.

    As the realisation starts to dawn that the prospects for future capital gains are fading, investors with a negative gearing agenda will exit the market.

    The ‘problem’ of negative gearing will evaporate without any politician upsetting anyone.

    Once the negative gearing business model is defunct and no one is doing it, that is the time to busy a couple of parliamentary counsel to abolish or limit it.

    Why pick a fight about negative gearing when you don’t need to.

    The are plenty of better ways of skinning the housing market failure cat.

    • “..NG debate is a distraction..”

      “Policies to expand supply .. are the best way to put downward pressure on new house prices and eventually existing house prices.”

      Restricting NG to new builds WOULD expand supply.

      • +1

        and it would be the kind of supply that wouldn’t require additional infrastructure.

        the only losers would be the rent-seeking speculators.
        they’d be forced to look at more constructive ways to fund their retirements… and we just can’t have that can we?

        why aren’t more people mad about it?
        because australia is like one big republican party and our media is fox news