How Keating missed the negative gearing boat

By Gavin Putland, cross-posted from the Land Values Research Group:

The McKell Institute’s report on negative gearing (Richard Holden, Switching Gears, June 2015) concluded that negative gearing for future investors should be allowed only for new homes. I have been pushing that idea since 2003. But the McKell report, in its account of the Hawke-Keating government’s brief quarantining of negative gearing (based on contemporary reports in the Sydney Morning Herald and the Sun-Herald), reveals that the idea dates back at least as far as 1987. I quote from pp.21–22:

Treasurer Paul Keating insisted at the time that the overwhelming factor deterring potential investors was high interest rates, needed to counter high inflation. By December 1986, the interest rate on loans to building societies had reached 15.5%, with NSW particularly hard hit, as new dwelling commencements decline [sic] by some 28% on the previous year.

By February 1987, the Real Estate Institute (REI) of NSW joined the HIA in blaming [disallowance of] negative gearing for contributing to a “rental crisis” in Sydney. …

In March, the Master Builders Federation of Australia released figures showing that Sydney rental prices had skyrocketed by 25% in the previous 12 months. …

By April, BIS Shrapnel released data showing that the level of new dwelling constructions had plummeted to a 10 year low….

By June 1987, the Liberal Party announced that if elected, it would replace Labor’s prohibition of negative gearing on rental properties with a system allowing deductions from taxable income on interest incurred on borrowings up to 80 per cent of the value of the rental property.

This received immediate support from the Confederation of Australian Industry (CAI) and the NSW REI, but was sternly criticized by the Tenants Union (TU) of NSW.

TU spokesman Tracy Goulding… argued that “These taxes aren’t directly responsible for the housing crisis. The rental crisis is an ongoing thing…”

Nevertheless, the Coalition began to ramp up its attacks on negative gearing as contributing to higher rental prices and longer public housing waiting lists. …

In August, the NSW REI released new figures which showed that Sydney rental prices had increased by 66% in the previous 12 months…

That apocalyptic claim is not supported by ABS figures. Nor is it clear how the Liberal Party’s proposal would have alleviated the construction slump when the tax deduction was not tied to construction. A clearer solution came from elsewhere (pp.22–23, my emphasis):

At this point, the West Australian Government began lobbying the Prime Minister to reform negative gearing so as to reintroduce it but for new housing only. … The acting WA Premier, Mr Mal Bryce, said that the shortage of private rental accommodation was a major concern in the community, but also urged the government to not reintroduce the incentive for existing houses on the basis that it would drive up prices….

Under growing pressure from his political base in NSW, the Treasurer began to consider several options for reform, including:

  • Allowing investors to claim interest expenses against gross rental income before deduction of operating expenses, which would allow more interest to be claimed as a tax deduction and increase returns to investors;
  • Allowing interest costs on up to a set percentage of borrowings, effectively setting an equity limit below which the negative gearing rules would not apply;
  • Setting a borrowing limit on interest deductibility; and,
  • The West Australian Premier’s proposal to restrict negative gearing to new supply.

In September, Treasurer Paul Keating took to cabinet a proposal that would allow investors to claim interest expenses as a tax deduction against gross rental income… but cabinet was split and no decision was made.

Note that Keating’s proposal, like the Liberal Party’s proposal, was not tied to construction! The rest is history (p.23):

Eventually, the Treasurer’s preferred approach was rejected, and the Government revealed that it would reinstate negative gearing in its entirety.

The reinstatement of full negative gearing coincided with the minimum in the house price index (red curve) in the following graph. Next month, the stock market crashed. In the new year, house prices entered bubble territory.


And in 1989 the bubble burst, together with its companion in commercial property — giving us the recession we had to have, turning Keating’s surpluses into deficits, and trashing his place in history.


    • From an email I received on April 9 from the Shadow Assistant Treasurer Andrew Leigh (Member for Fraser):

      “Dear … and …,

      Thank you for taking the time to write to me.

      The Labor Opposition is keen to hear from the community, experts in the field, and other stakeholders. You have touched on a broad range of policy areas in your email and these are all feeding into our discussion as we formulate a comprehensive tax policy for the next election.

      We are determined not to take the same approach as the Abbott Opposition did by entering government without ideas or vision. As part of my own portfolio I have been contributing to the conversation around multinational profitshifting. If you are interested in some of my work in that space you can find a link to a major speech at the McKell Institute earlier this year at this link.

      I appreciate you sharing your ideas for a fairer and more equitable Australia – I’ll take them on board for conisderation.

      Yours sincerely,

      Andrew Leigh
      Federal Member for Fraser
      Shadow Assistant Treasurer
      Shadow Minister for Competition”

      In other words, watch this space…

  1. It just goes to show how the longer they persist with a lie, the easier it is to perpetuate it.

    • Some believe that a “Captain’s Call” WAS made at the time, but by Bob Hawke rather than Paul Keating. We might never know for sure.

    • He was the politician who laid the path for the financial mess we are now in. The master of the scare campaign – think Hewson’s fiscal reform package and Keating’s ‘big new tax’ scare – the big new tax that in hindsight we found actually wanted to implement but was knocked back. That’s why no politician is game to do anything anymore.

      • Torchwood1979

        Yeah Keating scared everyone but Hewson’s 15% GST came with slashing welfare spending, effectively dismantling Medicare, a draconian IR regime and giving the lion’s share of the tax cuts to high income earners based on a heap of assumptions that the wealth would “trickle down”. It was Reaganomics and Thatcherism writ large.

        The complex economic arguments contained in Fightback! were above the average punter, and Keating knew that he needed a backbone for his counter attack and scaring the crap out of everyone over the GST was it. But in addition to that was Keatin’s relentless attack on the radical overhaul of IR, Medicare and social security. BTW Fightback! also had this genius idea of allowing young people to access their Super in order to get a deposit for a house.

        For your happy Monday viewing pleasure here are two videos of this era:
        1. A great 60 Minutes interview (FF to 14 mins)
        2. Interview with Mike Willisee
        3. John Hewson’s infamous birthday cake GST interview. Proof that Hewson was an economics professor first and politician a distant second

        Mind you, Keating’s first attempt to capitalise on #3 backfired quite hilariously when the cake shop owner he visited gave the PM a good ear bashing over payroll tax, which Hewson’s GST would have (in theory) abolished!

  2. Keating [+Hawke] did not miss the NG boat, he was our Bill Clinton [Rubinomics].

    Both took traditional Labour party’s and converted them to neoliberal lite, progressive ID consumerism in contrast to LIB’s more antiquarian social theory. That includes Shorten and Julia, right wing labour aka neoliberalism.

    Skippy…. Romanticism is not a good observer tool imo…

    • AusDreamNoMore

      I was too young to enjoy Keating time as PM. With the YouTube videos of him though I see a legend.

  3. Negative gearing should not be limited to new homes. The last thing we need is another tax distortion that favors cookie cutter investor stock. Nor should property investment be treated any differently from any other kind of investment. The underlying issue here is the tax payer footing half the bill for speculative investment activity (across all asset classes but particularly in housing) which presents a serious risk to capital values and market stability. The resolution here is simple: Do not allow investors to offset operating losses against other sources of income. Housing supply and affordability issues should be addressed separately. Negative gearing reform should not be touted as the silver bullet for Australia’s housing market woes.

    • Negative gearing reform to limit it to new homes only might be more likely to be politically successful than eliminating it altogether and it would be an improvement on the current situation. Agree about the result being cookie cutter investor stock which is happening in new developments anyway.

      “Nor should property investment be treated any differently from any other kind of investment”

      Well that is the cultural norm but the part of property that is land is provided by nature. Culturally, and academically, since neoclassical economics began, we are conditioned to believe that nature is property.
      This link is to an excerpt from a recent book, and is about the consequences of that assumption:

      • I’m not suggesting removing it all together. I’m proposing that investors only be allowed to offset it against the asset that incurred the loss. That way, the investment must make an operating profit at some stage for the investor to receive the tax benefit.

  4. Who’s up for triva? It’s called “what group?” and it’s pretty challenging.

    Reward on offer to those that it applies to is shame.

    So good luck and here we go…


    What group has sucked the teet of the Aussie economy to the point of irreversible damage?
    What group has price-gouged their kids?
    What group wants no part to play in advocating for future gens?
    What group can lay claim to being the most narcissistic, hedonistic, self-centred, self-absorbed generations in the history of mankind?
    What group would drive by a homeless person in a combi-van and never consider stopping?
    What group will soon exit the workforce with their massive defined-benefits, of which dont apply to subsequent gens anymore?
    What group sit in the workforce, advertising their laziness and dubious work-ethic, in an attempt to get a redundancy so they can scoot off to a wealthy retirement, while the youth slave in an attempt to hold on to a job that will be offshored no matter what they do?
    What group has consumed, devoured to the very core all of Australia’s offerings, spitting out remnants of something unuseable for our kids futures?
    What group fails to realise how good they have/are having it?
    What group should, in good conscience, pass on an Australia better than they received it (but wont)?
    What group had their cake, ate it too, and ate subsequent generations’ cakes as well?
    What group denies the irrefutable (out of cowardice, dumb pride, default simple survival instinct) and denies knowing the answers that are blatantly obvious to them?
    What group knows they can help stop the downward spiral of Australia’s economic woes but wont?
    What group has left nothing of a country for their children to live in?
    What group has allowed illegal foreign property investment, and sold their homes off to these same people?
    What group has willingly allowed actions directly resulting in our kids being placed on the scrap heap?
    What group has, and continues to destroy, the Australian country?
    What group has single-handedly wasted our nation?
    What group can claim fame to the erosion of the Aussie spirit of fair go?
    What group has proven competence in multitasking by articulating that you can stealthily chip away at your kids futures, and concurrently tokenise interest in their future welfare?
    What group will demand good healthcare in their own age, but seriously dont deserve it or the $ required to provide it? (funny enough, they probably wont – think 457s).
    What group has aided and abetted massive rises in essential services such as food, and gas, by selling off the farm?
    What group has done everything possible to stifle young kids dreams of home ownership, by turning up to auctions hand in hand with their illegal chinese investor buddies, and outbid/outflank/decimate them via greed?
    What group can never lay claim to doing all they could for future Aussie generations, on their deathbed!
    What group, due to their massive numbers and thus political weight, could have changed things, but chose not to?
    What group are the masters of passing the buck, its not their problem?
    What group has a ready-made, old, tired, default, lazy and false statement about their part to play in Australa’s decline?
    What group will have the funds to flee the most expensive country to live in on Earth just before a massive revolt by their kids generations?
    What group can play dumb to this tragedy that they not only helped create, but expedited its outcome?
    What group, has the luxury of time, to sit back on their asses, and philsophise about the social disintegration that afflict others than themselves, and simultaneosly offers no meaningful input into addressing those same issues?
    What group really needs to be held accountable for their inaction re Australia’s demise, and needs the youth to make this generation irrelevant in future decision-making of Australia’s destiny?
    What group has proven they dont want to help Australia improve its econominc position, and would rather continue on with the status quo?
    What group thinks nothing of allowing Australa to be sold off, as long their own bubble is not popped?
    What group want their kids to work part time till theyre 90, renting forever, go from job to job, while they contemplate their next holiday and property portfolio?
    What group will conveniently resort to transparent lying about their lack of contribution into future Australian prosperity?
    What group needs a gold medal in selfishness?
    What group leaves Australia worse off?
    What group needs to retire?
    What group needs to stop being CEOs?
    What group needs to stop being the dominant force in Australa?
    What group needs to become irrelevant?
    What group deserves a poor retirement experience?
    What group needs the truth to be told?
    What group needs to fess up re their greed?
    What group is a disgrace?
    What group has sold Australia off?
    What group doesnt care about others but themselves?
    What group deserves no respect?
    What group are not mentor-grade material nor never could claim to be?
    What group are visionless?
    What group are stealthy?
    What group are opportunists?
    What group are shallow thinkers?
    What group sadisdically talk about investments, holidays, super, all in the presence of their impoverished kids or other gens?
    What group causes nausea every time you raise their generation’s name?

    What answer is the only possible answer to all of these questions?


    Ill give you a clue about the answers to all of the above…

    There is only one answer..the BOOMER gen.

    What a nasty lot (as a gen).

    If youre born between 46-64, you know what all this means.

    You are the group that declared war on future generations by allowing Australia to go to hell, all via your inaction, your greed, your political weight and vested interests all to the detriment of all other than your own.

    Dont take it personally. It’s fact. It’s life. It’s sad but true. Just own up.

    It is time for groups other than yours, to turn the tide, and do unto YOU what YOU have done unto them.