Federal treasurer Scott Morrison has gone to the UK to look at housing affordability solutions, but he’s been fitted with blinkers and saddled with ideological lead. He must only look at the very promising bond style of finance used in the UK that resembles the Clean Energy Finance Corporation, and is strongly lauded, but avert his eyes to anything else that might work just as well or better, such as tweaks to negative gearing that the conservatives in the UK have approved.

From what we can gather this newly implemented policy in the UK to further restrict a negative gearing design that already restricts claims to the asset it relates to rather than income earned from other sources, has quickly had a positive impact on affordability and lower levels of investment lending.

Hyper investment activity is a problem in the UK as well as Australia and many other places for its tendency to push up prices and make housing out of reach for first home buyers who can’t compete.

In Australia negative gearing provides a tax deduction, which amounts to a government subsidy to people by allowing them to deduct the interest on investments from any other source of income.

First home buyers, by contrast, must contend with extremely low interest rates on their savings and pay tax on the earnings.

According to what we know our treasurer ScoMo’s main game is to learn about the bond aggregation program for housing in the UK that works a bit like our Clean Energy Finance Corporation, which steps into investment propositions that are essentially sound but which for one reason or another don’t meet conventional investment parameters. From what we can gather it sounds hugely promising and we wish our treasurer much luck with bringing a similar model to Australia.

ScoMo’s boss Malcolm Turnbull has staked out housing affordability as the latest issue du jour that just might restore his eroding credibility. (That housing is well removed from climate and fossil fuels gives him hope that solutions are not shot down at first breath by his own lords and masters.)

And yet, Turnbull has already hobbled his chance of success by ruling out other potential options that could enhance the objective of fostering greater affordability: even if negative gearing restrictions work in the UK there is no way we are going to use them in Australia, he said (signalling of course he has another set of lords and masters to satisfy on the property investment side of the lobby corridor).

Sadly, it seems new NSW premier Gladys Berejiklian has done the same on the housing issue for NSW. She signalled housing is crucial to her agenda but that she will not push the feds to even tweak negative gearing.

At the same time she’s flagged that greater supply is the answer.

Oops, it looks like Ms Berejiklian has already swallowed the Kool-Aid, along with her federal counterparts. It’s the intoxicant of choice promoted for decades by the development lobby, along with the abolition of stamp duty – and, if possible, no development taxes of any sort. Property has traditionally propped up the bulk of government coffers through history so we’d need another source of taxation.

Maybe the property industry could suggest the government pull back on some of the $12 billion in tax subsidies paid to the fossil fuel industry.

Instead the sometimes flagged suggestion, including by former NSW premier Mike Baird, is a hike in GST. What a great and fair solution that would be – to slug everyone equally on food and other essentials whether they have $2 million in their super fund or are on the pension. But that’s another story.

The story that matters right now is housing affordability, as Sydney announces it’s crashed through the magic million barrier to a median price of around $1.1 million, and Melbourne’s hit $800,000.

The question is why is removing or changing negative gearing such a problem for the property industry?

Stockland’s chief executive Mark Steinert last year said its removal would cost jobs and remove the incentive for investors to accept lower rentals.

But the market sets rentals and we haven’t heard of any landlords lately who voluntarily give a discount. Besides the tax department takes a dim view of cost claims below market and tends to trigger deeming provisions (adjusting your claims to a notional market level and then working out your tax liability.)

On the impact on jobs, we’re not so sure of that since the demand for the number of houses would remain, just at a lower price point and you can bet that the input prices adjust accordingly. And besides if property was cheaper wouldn’t the laws of demand and supply kick in and more people would buy?

Isn’t that the argument the property industry uses anyway on supply; that more supply would make houses more affordable?

See what Dr Andrea Sharam says in our article here, about the mess of circular and nonsensical arguments used by the property industry to boost its own interests, which can push up prices, not lower them. Now we love the property industry; it’s generally doing a great job and has the potential to revolutionise our world on a sustainable footing so we are all for it. But its traditional strategic arguments are worn out. They’re not doing the broader industry any favours by continuing to obfuscate on what’s really going on and what the true dynamics are. We could all work on this together and get to a solution if we stripped away the rhetoric.

Sharam, as an impartial observer, argues for innovations in housing design and delivery that could really “Uberise” the housing market, the topic of our Surround Sound on Housing last year. A key part of the innovation story now is finance and here the bond idea sounds excellent. So do a number of other ideas that mix rent and ownership and seem to be attracting huge efforts from a number of players.

One thing unlikely to improve affordability is more supply.

Here’s an example of the silliness we have to endure from very well resourced industry lobby groups that should know better. In the lead up to our Surround Sound we asked a very senior executive of a large property development company about supply.

Here’s how the conversation went:

The Fifth Estate: Okay, let’s say we significantly increase supply of housing; let’s say we double it. Would young people be able to once more buy a flat for $480,000 or $550,000?

Developer: No, they wouldn’t. It wouldn’t bring prices down. But it might stop housing going up by 10 per cent a year.

So what’s the point of pushing for more supply?

Because it keeps the industry gainfully employed and because the NSW government says the property industry is a key fundamental component in its economy. Maybe.

But if so, why not say so? And why not prove it? We need to better understand where pressure points of pain for sections of the economy and society, honestly and openly, then you have a better chance to minimise them and find solutions. Clearly we need reasonable supply, but where? On the fringes? That won’t solve affordability for young people and critical workers without imposing huge travel burdens on them.

We also have to assess honestly and openly how many units remain empty, acting as bank deposits for foreign owners. We hear ridiculously high levels, and the numbers are alarming enough to call for serious research. What about a big tax slug for empty flats, with proceeds to be pumped into affordable housing? Just saying…

Other measures that won’t work

Other measures that are touted as solutions such as increasing the home owners grant would certainly not work. We know that tax grants of this kind almost immediately pushes up prices by the size of the grant, unless the property is in the sticks where there’s not much competition.

On the call for removal of stamp duty. Same. Get rid of stamp duty and watch the amount people will pay for their property jump by the same; people will pay the most they can possible scrabble together. The same mechanism applies.

On taxing land owners, this sounds good in theory because you can’t escape a tax based on an asset you can’t move off shore or hide in some way, but it sounds like a dangerous thing to do to sitting owners who might be on low income and who, through no action of their own, suddenly find that the house they’ve owned for 30 years is now worth $3 million.

Yes they could reverse mortgage their property to pay the land tax but those schemes can be expensive and not friendly to vulnerable borrowers. If we’re worried about existing mortgage owners this is just as big a political power keg.

On the other hand a tax on the uplift in value on inheritance, or because of new infrastructure, sounds much fairer – and politically benign.

Another thing that might work to find additional funding for the government because this is a problem that money can definitely solve is to finally properly tackle the huge corporations that continue to make squillions off the back of this excellent and bountiful country and all its infrastructure that we the people have helped to create, not to mention the natural treasures that we share.

To solve these wicked problems we need to unravel the truth of where the pain lies and to look at a fresh set of potential solutions, from different sources – not keep repeating the same old mantra that’s been so debunked and so ridiculed it’s incredible to hear the PM and the NSW premier on day one of her appointment say supply is the answer to housing affordability.

Someone who’s thought long and hard about affordability is Wendy Hayhurst, chief executive of the NSW Federation of Housing Associations.

See her comments in our article on advice to Ms Berejiklian here. There are four key areas that could work in NSW at least and no doubt could serve as a model elsewhere:

  • Inclusionary zoning and affordable housing targets for privately owned development sites
  • Use of government land destined for housing development, rather than seeking to maximise returns to the Treasury
  • Government incentives to trigger private and not for profit investment into affordable housing through instruments such as the Social and Affordable Housing Fund using, for instance, “a fraction” of stamp duty receipts
  • Actively supporting the creation of an Affordable Housing Financial Intermediary.

So, as in the war on climate action, on energy efficiency and sustainability, not to mention the almost criminal neglect of dodgy building practices and building materials, it’s never about the mechanics or logic of what’s possible but about the loudest voice on the bus.

Time for a new loud voice.

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  1. Excellent article Tina. I agree that offsetting the costs of an investment property against the income of the property is basic business practice. However, offsetting the costs against the tax you pay on your wages is another matter. I don’t hear people using the word wages, just “other income sources”. I think those ordinary wage-earners who don’t get such benefits from their tax returns would get onside with this. Of course, there are other income sources besides wages – but wages are in the mum and dad space – the people that politicians say will be affected.

  2. Thanks for the insightful article Tina.

    My cousin, Bill Moss, of Macquarie Bank fame, pointed out in his book the problem with allowing vested interests to run the property agenda. They’re only in it for the money after all. Gladys sadly seems to have an ideological vested interest. And she obviously already owns a house in which to live and probably a few investment properties on the side.

  3. Negative gearing has been around for as long as we have had a tax system; it’s not the cause of high housing costs in Australia. No one has complained about Woolies and Masters – that was the biggest negative gearing rort out! Use the loss from Masters to offset the profits in the rest of he group. Its the same as using a loss from a rental property to offset profits from another source. Are you seriously suggesting businesses can’t off set losses from one group against another? You would need to rewrite the entire tax code. Any changes to negative gearing for housing could be circumvented by forming a trust and trading as a business. So it’s a waste of time to talk about changing negative gearing – that’s the real reason the government isn’t looking at it.

    The reason housing is expensive is because banks have been deregulated. Look at the historical charts – prices went nowhere until banks were deregulated and could lend as much as they wanted. There is a direct correlation between when prices started to rise and banks were deregulated. As long as banks can do that prizes will rise until the ponzi scheme crashes.

    1. Yes, good point, agree the banks and the cost of money have been behind every property boom and bust that I’ve ever covered (over a long time) and thanks for reminding me. I keep saying to young frustrated people, just wait till the interest rates go up and be ready to pounce then. The proviso being that they have a deposit or kind, well-off parents who can help. I’m also not sure we are ready to nationalise the banks and control what they do with interest rates.
      What spurred this article was frustration that governments can rule out solutions and flag answers (supply) before an evidenced based assessment. And of course I only touched on the topic; it’s so complex. And on negative gearing I’m not suggesting it should be abolished and am well aware we offset business expenses against taxes, but a tweaking of the system to curtail multiple property investments for instance might help. Let’s be more creative, and there is no reason we can’t quarantine changes to property and not affect other asset classes we don’t have a problem with. What is annoying is the automatic exclusion of any tool as a solution. This smacks of pandering to one voice rather than a genuine commitment to find solutions.