Housing policy reform: Do we have a changing landscape?

Last year ABC’s Q&A ran a one-hour special with then Prime-Minister, Julia Gillard.  

At the time, Labor’s popularity was at an all time low, with the latest Galaxy poll showing a primary vote of 31%, compared to the Coalition's 49%.  

The Q&A special followed a 12 month gap since Julia Gillard had faced the live audience in which voters – including those in the land of social media - can directly grill Australia’s politicians and business leaders about issues close to the heart.  

Inevitably, Julia Gillard was questioned about the growing cost of housing – significantly negative gearing – which as I explained here, has assisted in distorting the preferences of our buying market, not aiding new supply, but instead boosting the competition and subsequently price of second hand stock.  

Audience member Robyn Tracey asked - “Has Australia lost the will for reform of our taxation system? Has a flat rate of tax been considered to replace our present complicated system? Why hasn’t negative gearing been abolished despite recommendations to do so by the Henry Tax Review and by leading economists?”

Gillard’s answer was predictable;  

"For negative gearing, we didn't agree with the Henry tax review. We ruled that out. We think that, you know, an abolition of negative gearing would cause distortions to the property market that we didn't want to see…"  

Tony Jones then questioned why GST had not been included in the Henry tax review, to which Ms Gillard commented:  

"GST, at the end of the day, is a regressive tax and so we are looking for tax reform in other areas."

Well, you can’t get a much more regressive tax than negative gearing, which disproportionately benefits high-income earners, over those on a lower wage.  

Close to 40% of households in the top income quintile access negative gearing and benefit from a tax concession of more than $70 per week.  

This is compared to less than 5% in the bottom quintile who benefit no more than $10 per week, and of course, there is also limited ability to negatively gear in a self managed super fund.  

The continued Labor stance against negative gearing is not out of step with the Coalition. Whilst still in opposition, Tony Abbot dismissed claims that the Liberals would include negative gearing as part of their tax review, and any rumour suggesting otherwise, “had no substance whatsoever.” Not surprisingly, it left many advocates across the real estate and finance sector breathing a collective sigh of relief.  

Therefore, when last Monday’s Q&A subtitled ‘Open for business' aired, featuring the highly acclaimed founder of Aussie Home Loans John Symond - a company which profits significantly from negatively geared investors – it was some surprise to hear him advocating for tax reform and a moderation of the current rules.  

In reply to audience member Leanne Murphy – who asked:  

“Do you think negative gearing should be abolished, or at least quarantined, only available for new dwellings, thus giving low-income earners the opportunity to get into the property market?”

Mr Symond answered:  

“Absolutely. I come back to overhauling the tax system. Negative gearing wasn't designed for people who can afford to go and buy $1 million, $2 million, $3 million houses or apartments for negative gearing to offset the bulk of their interest payment off their tax. So negative gearing does need to be looked at in the tax system because I don't think it is fair at the moment. I think it leans very heavily to the high income earners and that needs to be brought into line.”

His comments were followed in a similar vein from the other panellists who agreed something needs to be done, but swiftly pushed the momentum back under the carpet with the excuse we hear all too often;  

“I believe, is an absolute political hot potato and no government is going to touch it,” said Carol Schwartz.  

Clearly from Abbot’s comment above, in the present context this is correct. However, meanwhile it’s worth asking if the landscape is changing?  

To hear business leaders finally admit we’re heading down the road which is further dividing the gap between the haves and have nots, is clearly mirrored across the social media network as a new generation of voters increasingly question the legacy they’ve been left with.  

Many other countries have instilled the concept of home ownership being part of the national dream and structured their tax policies accordingly, favouring vendor over renter.  Banks have happily fed our owner-occupier ambitions, resulting in a disproportionate amount of credit pumped into the residential market - pushing up our private debt to disposable income ratio to a peaky 150%, and as a consequence over the 2000s established median house prices in Australia have more than doubled.  

Generations have been bought up with the concept that, a mortgage, in a world full of spending temptations, is a forced savings account for retirement.  

Certainly, owning your own home outright by the time you reach 65 is advantageous; no one wants to be servicing a loan or rental payments on a restricted income stream.  

However, it’s an interesting concept, to have a forced savings account which requires the investor to pay a hefty sum of interest rather than receive it - as would be the case with other assets, where additional interest is collected.  

Not only is the house seen as a savings account, but also one against which buyers can leverage, enabling the purchase of a second home – usually by way of an interest only loan.  

So imbedded is this concept that even the most committed owner-occupiers I assist, searching for what they hope will be their last home in an environment where we’re all trying to squirrel away funds for retirement, are understandably very concentrated on the equity their purchase can achieve and how they can best aid their children along the way.  

In Australia our homes have been conceived as investments because they ‘always’ increase in value.  At least, this has been the case for a good number of years, benefitting the property lottery winners who got in early enough to take advantage of healthy capital gains.  

Unfortunately, the homes we’ve built to offset house price inflation, have done quite the reverse.  Heavily burdened with tax overlays, located in areas where zoning restrictions have encouraged land banking by larger developers, thereby reducing competition from smaller home builders, has done more to harm the construction industry, than aid.

With the median price for a house and land package in fringe suburbs starting around $400,000, there’s little to encourage families into the infrastructure sparse landscapes, yet this is where we expect homebuyers to migrate if they want to purchase a detached dwelling for less than capital city medians.  

With the only other option being a smallish apartment closer to town, for which the first home buyer demographic usually have to pitch against an investor, yet must purchase wisely if they want to leverage enough equity for the necessary upgrade after a few years of residency. Well, quite honestly, it’s become a fools game, which I suggest is not unlike musical chairs – everyone competing for the same second hand stock – not prepared to accept a lesser quality alternative.  

As such, first home buyers now enter the market as ‘first time investors’ – usually living off their parent’s goodwill in order to do so – and hoping to achieve similar capital gains.  

Rising house prices are part of an environment that has been manipulated by successive governments because – as Tim Toohey recently put it in a Goldman Sach’s report:  

“The wealth effect – i.e. increases in house prices/equity markets driving higher consumer spending – has been painted as the messiah for the domestic cyclical space.”  

Supposedly, when our house prices rise, it feels like Christmas for the economy, and thus, out come the credit cards boosting retail spending, and numerous other offshoots.  

However, as Toohey goes on to point out;  

‘The proportion of the population 60 plus and entering the asset drawdown phase of their life is now the dominant demographic force, contributing 50% of the population growth, and this is projected to rise to 60% by 2020.’

Therefore, as suggested with house price appreciation the “future for consumption growth is unlikely to reflect the past. “

It’s against this backdrop that a friend of mine was contacted a few weeks ago by a company posing as a market research group, who with clever questioning, managed to convince him to allow an ‘advisor’ to come to his home and demonstrate how he could reduce his income tax to ‘almost zero’.  

The sales representative proceeded to show lots of – (to quote) – ‘scary’ figures indicating how he would not have enough money upon which to retire, and then demonstrating how negative gearing into property - which the company would ‘choose’ on his behalf, would reverse this, to enable him to achieve ‘retirement riches’.  

Backed up with an extensive list of client testimonials, the service was of course offered free of charge – the rep explaining that he received payment from referrals to ‘partners’ such as financial advisors.  

Clearly in an era of ‘worried money,’ it’s not hard to conceive how inexperienced investors might be tempted to trust the advice of shoddy operators - in response, ASIC needs to look at the industry as a whole when it comes to unethical spruiking and not super funds in isolation.  

Notwithstanding, the information most buyers read in investment magazines and websites, is provided anecdotally by industry advocates, often bordering on financial advice, yet with no regulation overseeing the quality of the content – it’s left to ‘self regulation’ – reader beware.

Changing a well-weathered mindset is not going to be easy without political reform.  However, I really do ponder at the strength of social media in an age where younger generations are increasing asking questions and engaging in conversations, which in previous times would have been limited in their scope.

Questions such as, whether rising property prices are not so much the golden egg of economic growth, but rather a burden weighing on the progressive future of younger generations.  

Media headlines across mainstream outlets have suggested the need for a national conversation on housing affordability, however in reality the talking has been done.  

We’ve had the Henry Tax review and additionally numerous independent academic reports published, outlining exactly how to ease established house prices whist boosting effective supply. In truth, it’s action that’s needed, not conversation.  

Taxation of property should be progressive, discouraging practices such as land banking, and using property merely as a speculative investment. A broad based land value tax would assist in this respect.  

Additionally, renting should be accepted as more than a short term option with practices in other countries – such I pointed out last week - forming the basis for investigation as to how we can assist our own tenants.  

However, the most important change we can effect is to take away the headwinds affecting supply of family accommodation - a subject which has been covered in depth by Leith Van Onselen.  

Wherever you sit in relation to this subject, it can’t be denied the environment is changing, and like it or not, a new era of disillusioned voters will eventually have the upper hand.