Fairfax’s Elizabeth Knight has pinned the blame for Australia’s housing mess squarely on the shoulders of the federal government and called on it to immediately implement negative gearing reforms:
Who can fix Australia’s runaway house prices?..
Only the federal government has in its arsenal a weapon large enough to stop this juggernaut – it’s called negative gearing.
But for political reasons, the Coalition government refuses to act on what is a major economic risk for the country and a huge social issue for the millions – a whole generation – that have been locked out of the housing market.
In refusing to engage in any of the difficult work to solve this issue, the government has also placed a straitjacket on the Reserve Bank of Australia, which, despite the sluggish economy, underemployment and next-to-no wages growth, cannot lower interest rates…
To eliminate or wind back negative gearing tax breaks on housing would affect only investors – which would perfectly target the problem…
Prime Minister Malcolm Turnbull has steadfastly refused to address the need to act on negative gearing, choosing instead to blame the housing bubble on a lack of supply.
Knight is correct to blame the federal government for the housing mess, but one wonders why she has focused solely on negative gearing?
Basic economics tells us there are two sides to the housing equation: a demand-side and a supply-side.
If you implement a policy that raises (lowers) demand, it will raise (lower) prices and reduce (improve) affordability [other things equal].
And if you implement a policy that raises (lowers) supply, it will lower (raise) prices and increase (reduce) affordability [other things equal].
The federal government collects around 80% of total taxpayer revenues. It controls the various demand-side levers, including tax policy (including negative hearing and the CGT discount), as well as policies surrounding immigration and foreign investment.
The states, by contrast, control land-use and planning, but they are hamstrung in freeing-up land supply because they lack the funding to build the infrastructure and supply the services necessary for expansion. Accordingly, the states have an inherent bias against urban ‘sprawl’, which is incompatible with the ‘Big Australia’ mass immigration settings operated by the federal government, which is jamming 80,000 to 100,000-plus people into Sydney and Melbourne each year.
The fact remains that the federal government could ‘solve’ housing affordability if it wanted to via addressing both the demand and supply sides by:
- Slashing immigration to sensible and sustainable levels [reduces demand];
- Undertaking tax reforms like unwinding negative gearing and the CGT discount [reduces speculative demand];
- Tightening rules and enforcement on foreign ownership [reduces foreign demand];
- Extending anti-money laundering rules to real estate gatekeepers [reduces foreign demand]; and
- Providing the states with incentive payments to:
- undertake land-use and planning reforms [boosts supply];
- swap stamp duties for land taxes [boosts effective supply]; and
- reform rental tenancy laws to give greater security of tenure [reduces demand for home ownership].
Sadly, the Turnbull Government has instead chosen to make motherhood statements on the need to boost supply (effectively blaming the states), while maintaining the throttle on immigration and leaving the other demand-side levers wide open. They are housing affordability phonies.
