ANZ calls for “rational debate” on property taxes

By Leith van Onselen

ANZ’s bank’s Australian chief, Phil Chronican, has called for a “rational debate” on Australia’s property taxation laws, including negative gearing, warning that current arrangements have helped create an “irrational obsession”, whereby too much of the nation’s capital is being channeled into property. From The Canberra Times:

“I do worry that some people behave as if housing is always a one-way bet,” Mr Chronican said.

“I think there is a bit of an irrational obsession with housing as an investment class. For many investors, they would be better off in assets other than housing.”

…Joining experts such as economist Saul Eslake from Bank of America Merrill Lynch, Mr Chronican called for a debate about how housing was taxed.

He fell short of calling for an end to negative gearing, but said tax rules should be more “even handed”…

Chronican also tentatively supported the implementation of macro-prudential controls on investor mortgages, noting that “it’s perfectly sound and sensible to ask ourselves whether there are tools that might … lean on that a bit”, but also noted that “any intervention from the RBA was only a short-term response that would not address the underlying reasons for the popularity of housing speculation”.

It is heartening to read such comments by a senior Australian banker.

Australia’s tax system has made investment into housing a relatively attractive proposition via a combination of high tax rates on savings, as well as tax generous concessions like negative gearing and capital gains tax discounts. As a result, demand for housing is higher than it otherwise would be, resulting in too much of the nation’s capital being tied-up in housing, chocking-off productive areas of the economy. Negative gearing also undermines the progressive nature of the income tax and is a significant cost to government revenue, all the while doing little to increase the housing supply stock.

A rational debate on Australia’s property taxation arrangements is long overdue on financial stability, housing affordability, equity and Budget sustainability grounds, and hopefully will be tackled in the Government’s upcoming tax White Paper.

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Unconventional Economist

Comments

    • I’ll interpret it for you:
      “We can’t compete with the other 3 on mortgage lending for some reason, so we want some regulation to clamp down mortgage lending. It will hurt us, but it will hurt the others much more.”

      Edit: ” PS. We don’t think that we’ll be able to improve on or even equal this year’s bubblicious result next year, so we want something external to blame.”

      • Hah, nice one peachy.

        It’s funny though because there seems to be a wide spread acknowledgement of the issue.

        The danger here is the game becoming one of admitting there’s an issue, knowing what will really fix it but do something else as a token just to be seen to be doing something.

    • Doesn’t ANZ have the smallest residential loan book out if the big 4? Probably something to do with that…

    • The catch is that if the present situation were to persist it would constitute an ‘existential threat’ to his organisation and other organisations like his.

      Thus, now would be a good time for a ‘rational’ debate.

      Ipso facto, the madness leading up to the disastrous position we find ourselves in has been utterly ‘irrational’.

      • Exactly right. If the situation keeps going, it will not be only an “existential threat” to the banks, it will be an existential threat to Australia’s entire economy and its discredited political system.

        Yet they’re talking about introducing macroprudential without first getting rid of the tax distorting subsidies for land speculation like negative gearing and capital gains tax concessions, which is like standing on your brake and accelerator pedals at the same time. Our country’s denialist ruling elite has become schizophrenic. They are certifiably insane.

        • If the situation keeps going, it will not be only an “existential threat” to the banks, it will be an existential threat to Australia’s entire economy and its discredited political system.

          It is already!

      • “It is already!”

        Yep We’re too late by about 40 to 50 years…maybe even 60 years!

        “which is like standing on your brake and accelerator pedals at the same time”

        That’s the best simile for the situation that I’ve seen!

      • “which is like standing on your brake and accelerator pedals at the same time”

        I do that when warming my brakes & then through early cornering. It trails the back out & keeps the boost up ready for a better escape velocity out of the corner………… My track times are noticeably lower! It’s a fraught way to find an edge & It also badly wears the pads, discs, strains the clutch & driveline, uses extra juice……….. Bloody expensive way to drive unless you’re sponsored. Not a good way to go for a sustainable endurance pace either – but I’m only there for a short term sprint, ……….& so are they!

      • migtronixMEMBER

        Nicely laboured there Nudge, I was moving my feet to pedals as I followed you round the track there 🙂

    • He wants to be the next CEO and can’t be seen to be blindly backing the bubble. When it all blows up he will point to his “warnings”.

    • +1 How about some of that “rational debate” about the massive taxpayer / depositor backstop that our banks have?

    • Yes – the rational debate we need to be having is how any bank that wobbles and can’t pay its way will be acquired by the taxpayer.

  1. And it’s not even 1 April!

    I’m gobsmacked.

    ‘…any intervention from the RBA was only a short-term response that would not address the underlying reasons for the popularity of housing speculation.’

    Good on him. I do wonder if he’s just signed his own death warrant in the industry though. Maybe his boss will get a call from Mattius Corman later today….

    • I think he is simply engaging in the application of tin plate to the seat of his pants.

      When this gets messy, and it will, the story will be that it was a massive failure of regulation and public policy and the banks sounded warnings.

      Can someone explain to me how macroprudential is going to solve the fundamental problem that our economy has been on running on property speculation and household debt and if macroprudential is applied to slow that very market the economy will tank.

      The idea that there is an economy waiting to kick in when macroprudential shuts down the speculator fueled economy is very optimistic.

      Especially when few people want direct regulation to limit the inflows of capital driving up the dollar (other than by the daft non policy of further cutting interest rates) or ensure that the housing construction industry is able to build new low cost housing where people want to live.

      Macroprudential may slow the growth of the tumour but growing healthy economic tissue is another story.

      • “The idea that there is an economy waiting to kick in when macroprudential shuts down the speculator fueled economy is very optimistic”

        Optimistic? Nah! Fairies at the bottom of the garden!

      • The idea that there is an economy waiting to kick in when macroprudential shuts down the speculator fueled economy is very optimistic.

        It may be optimistic, we still need a viable non-mining / non-housing economy. The mining boom is in fast retreat, certainly in terms of income and employment, and housing is running on vapours. We can allow it to shoot to the moon, then crash and burn, or we can try to stabilise it, manage it down, and put it to sleep (aka “slow melt”).

        I’m not entirely sure the latter is possible now, but its worth trying, because a housing crash in an economy that has nothing else will be nothing short of a catastrophe.

        Has it ever occurred to the housing crashniks that our idiot political class will respond to a housing crash by making housing even more attractive as an investment class, thus sowing the seeds for an even bigger bubble and bust down the track?

      • Yep Lorax, the politicians are RE speculators and criminally irresponsible and the bulk of the population is so ignorant it would probably believe that an endless property bubble is good and is not in fact an economic tumour. The parliamentarians only care about their retirement plans, and if that means &*&^ing over the country, then that is exactly what they’ll do, forever.

  2. There was a rational debate, Phil, on what the future of the Australian economy should be – back in March 2009. Remember? You Melbourne based banks went for ‘business is the way’ and your Sydney counterparts went for ” property is the way!”. The NAB and your bank , frankly, did your best – and lost out to irrationality. What makes you think any discussions on the topic will produce a different outcome? They won’t! Only a market driven solution now awaits the Australasian property markets. One that has been templated for us by many others. And whilst there are differences, I’d suggest Japan a la 1989 will be the probable outcome. Remember, Phil? Tokyo property down by 90% in places. Debate all you like, it won’t make any difference now…..
    (PS: I was in Tokyo in August ’88 and I can tell you – NO ONE saw what was about to happen! No one…)

    • It does look increasingly like a repeat of Japan 1989 is the way it has to be for Australia.
      Good News: there’s still a lot of upside before those absurd Tokyo prices are matched in Sydney
      Bad News: Japan is a CAS economy and yet barely survived, can a CAD economy possibly survive such an abrupt end? I mean will external creditors simply forgive and forget? If not get ready for an Argentina style liquidity crises.

      Sad but it does seem that this is how it has to be!

      • A few people have been seeing it for some time. HnH has referrred to a Balance of Payments crisis at some point moving onto the national radar in the past.

        I’ve always thought we were smart enough to avoid that. I was wrong.

      • “Japan is a CAS economy and yet barely survived, can a CAD economy possibly survive such an abrupt end?”

        Excellent point however as CB knows we get our ‘surplus’ from cashing out our assets. We sell our mines; we sell our farms; we sell our food chain; we sell any asset we can. I’m thinking this will keep going until everything is sold and we have wasted our ‘God Given’ resources and the inheritance of our forefathers.

      • @flawse
        They wont need to buy our assets because they’ll own the mortgage notes, they’ll just foreclose into a liquidity vacuum. It wont matter how much you think the asset is worth if neither yourself nor anyone else can raise the cash.

        It’ll be worse than Greece because the EU wont come to the rescue and the exchange rate wont be able to do the heavy work without causing serious flow through price inflation. Wages, nobody knows what will happen there, however I’d expect wage compression coupled with raising unemployment.=.Imported Stagflation.

        The RBA will continue to can kick and pray that a better solution magically appears (and then take credit for it if it does)

      • Japan has never encouraged foreign investors to buy and bid up property prices. We excel in this area, and with plenty more money to find its way into Australian real estate from corrupt sources, our bubble can be kicked a long way further down the road, perhaps indefinitely.

    • I am seeing a lot of people in their mid-20s buying IPs while renting elsewhere or living with the parents.

      Madness.

  3. It certainly is time to have a rational debate.

    Let us debate the wisdom of making it easy for extra people to come here while making it hard for extra houses to be built.

    Let us debate the wisdom of borrowing money from overseas to buy existing Australian houses off each other.

    • Yes, I was wondering about Chronican’s misalignment with Smith.

      But I think it is a bit more than a good cop, bad cop routine behind closed doors.

      To me, Chronican’s words read as a complete and public disavowal, if not humiliation of Smith.

      I am not sure what is going on.

  4. I think what he is saying is very true. So much of the speculative demand is behavioural. Investors have an irrational obsession with housing, and then create stories after the fact to justify there portfolio decisions. The stories fly in the face of the numbers yet are considered common knowledge – ie a shortage in stock.

    The obsession goes back to the late 70’s early 80’s and is a key part of the boomers investor psychology. In the late 70’s housing outperformed equites and bonds. There was a once off portfolio shift into housing as an asset. The shift was driven by the boomers. In an environment where inflation always threatened to un-anchor on the upside, where debts were nominal, and the tax system favoured debt financing over equity, housing appeared as a preferred asset. All the capital gains have reinforced this “view” even if the underpinnings no longer exist. To the point now where the boomers are risking their retirement on their favoured asset. Hence why the whole thing has become behavioural or “irrationally exuberant” as Greenspan would say. Part of the solution should be to point out that the investment case for housing is pretty crap, in particular; there isn’t going to be an inflation breakout, there is no bond bubble, and there isn’t a shortage of stock.

    • The stories fly in the face of the numbers yet are considered common knowledge – ie a shortage in stock.

      No. The numbers show strong evidence of shortage. You keep clinging to that rookie error as if you have discovered something profound.

      • As yet there has been no serious explanation as to how the rental vacancy rates right across the country remain extremely tight nothwithstanding an agreed boom in negative gearing based investment.

        Those low vacancy rates confirm that even now there remains a severe shortage of available property.

        Even the alleged ‘butter mountains’ of holiday houses, properties kept off market by hygiene freaks and grannies spare bedrooms do not explain how there is an oversupply of houses yet an undersupply of houses available for rent.

        What does explain the low vacancy rate are construction rates that cannot keep up with the population growth rate.

        A slower population growth rate is the real solution for those who are obsessed that we build as few new houses as possible.

        Of course this demand and supply driven fiasco will probably lead to a recession that will drive down migration but in that curcumstance I would not be surprised that construction will collapse and there will still be a shortage.

  5. Curious? Why did Australia adopt negative gearing for investment property yet not allow mortgage interest tax deductions on primary residence (as in US Netherlands and Switzerland) ?

    • Just a guess, but perhaps the politicians didn’t want to tax the family home when capital gains tax was introduced and hence couldn’t allow tax deductions against the primary residence?

  6. A rational debate on Australia’s property taxation arrangements is long overdue on financial stability,
    Overdue or too late?

  7. When the government starts getting desperate for revenue they will target almost anything, and given real estate cannot move it will be a soft target.

    Just be patient and watch the idiots in government scramble for every dollar they can get their hands on.

    • Over a million neg geared voters will say they are not soft targets.

      There will be wailing and foot stamping and some harsh reality checks before the government has the guts to make the necessary changes. I doubt it will be this government too, Joe Hockey will fight any changes to NG till his last breathe.

      • Indeed. They’ll just tax labour more. They hate people who aren’t members of the investor class.

        Of course, that won’t work.

    • Actually AngryMan, nobody has to submit to FIRB approval. It’s a voluntary thing. Even if the rules state that foreigners are supposed to get FIRB approval, there are no penalties imposed for anyone who doesn’t, and there are increasingly more and more foreign investors who are realising what a pushover we are.