Labor’s shadow treasurer, Chris Bowen, has stepped-up the party’s push for changes to negative gearing and the capital gains tax (CGT) discount, warning that these lurks are undermining the stability of Australia’s financial system, as noted by the Federal Government’s financial system inquiry, the Grattan Institute and the International Monetary Fund. From The AFR:
“It’s now been 28 months since the government received its Financial Systems Inquiry (FSI) report”, Mr Bowen says.
“Despite tax not being part of the terms of reference, David Murray put up in big red flashing lights that negative gearing and capital gains tax concessions are ‘major tax distortions’ which tend ‘to encourage leveraged and speculative investment in housing’ and that ‘housing is a potential source of systemic risk for the financial system and the economy,'” Mr Bowen says.
“Mr Murray has recently confirmed he stands by those remarks.”
Mr Bowen says that two years on leverage continues to rise, hitting new record levels…
Mr Bowen notes the IMF said last year that “the tax system provides households with incentives for leveraged real estate investment that likely amplifies housing cycles”.
The Grattan Institute had also argued that one of the undesirable consequences of negative gearing included both increasing the volatility of housing markets and “increasing the risks to the Australian financial system”.
“Yet the government continues to sit on its hands,” he said…
The Coalition’s Michael Sukkar – the minister assisting in the development of a housing affordability package – has hit back with one of the lamest arguments I have read, claiming that Labor’s negative gearing policy would some how crowd-out first home buyers (FHBs). From The Australian:
Mr Sukkar said Labor’s plan to rein in negative gearing on existing homes but allow it to continue for those investing in new stock, would make things tougher for first-home buyers trying to buy a new-build home.
“Typically speaking, the entry level of the market for them is new estates and new developments,” Mr Sukkar said.
“Under Labor’s policy, every single investor will flock to the one asset class that has preferred tax treatment, and that’s new housing and new developments, so first-home buyers are never going to get a look-in.”
First, the existing negative gearing and CGT regime has already crowded-out FHBs – note the strong negative correlation between investors and FHBs below:
By restricting investment into existing dwellings – which is where most investment goes (see next chart) – Labor’s policy will obviously reduce competition for FHBs and enable them “to get a look-in”.
Sukkar’s argument that Labor’s policy would crowd-out FHBs from purchasing newly constructed dwellings also contradicts the Coalition’s stated policy towards foreign investment.
May I remind Sukkar what Treasurer Scott Morrison said in February regarding Australia’s foreign investment regime:
“The Government’s policy to channel foreign investment into new dwellings creates additional jobs in the construction industry, increases housing supply and supports economic growth”.
Which of course follows Kelly O’Dwyer’s comments in 2015:
“Currently the framework seeks to channel foreign investment in residential real estate into new dwellings in order to increase the housing stock for Australians to build, buy or rent. Foreign investment is encouraged in new dwellings whether they be apartments, units or homes because in addition to creating more supply, it also creates more jobs for the building and construction sector – all of which helps to grow our economy”.
How is Labor’s policy with regards to negative gearing any different to the Coalition’s policy on foreign investment?
Both policies seek to channel “investment into new dwellings”. Therefore, both should create “additional jobs in the construction industry”, “increase the housing stock for Australians to build, buy or rent”, support “economic growth”, and increase rental availability and affordability.
Joe Hockey understood this, which is why he urged the following is his valedictory parliamentary speech:
“…negative gearing should be skewed towards new housing so that there is an incentive to add to the housing stock rather than an incentive to speculate on existing property…”.
Like most Coalition MPs before him, Sukkar has chosen partisan lies over thoughtful policy discussion.
