Where do the parties stand on housing: part 2 - the Liberals

We observed last week that neither of the major parties has put forward a housing policy in the present federal election campaign.

Or have they? Maybe, just maybe, if you squint hard, read between the lines, and guess a bit, you can make out a housing policy.

First we take a hard squint at the Liberals.

In their 'Plan for Real Action', the Liberals state that:

We will improve housing affordability and encourage high levels of home ownership.

'High levels of home ownership' necessarily means 'low levels of rental property ownership' (there's no value judgement in that: these things are just the two sides of the one coin).

So what would the Liberals do to encourage low levels of rental property ownership, and at the same time improve affordability?

In looking for an answer, we should also note the Liberals' statement on fiscal policy, that 'we must start addressing the unsustainable structural imbalances in our Budget and get the Budget back on track to strong and sustainable surpluses' (p 7 of the Plan).

Having committed to a very expensive paid parental leave scheme, and to revenue-reducing cuts to company tax and the carbon pricing scheme, we must assume that the Liberals propose to encourage low levels of rental property ownership and improved affordability through means that would increase government revenues.

Thus, the answer becomes clear – or at least as clear as possible whilst squinting between lines. They must mean to reform Australia's tax treatment of negative gearing.

We've discussed negative gearing before. Briefly, 'negative gearing' is where a person borrows to buy an asset – for example, a rental property – and the cost of the debt is greater than the revenue generated by the asset. In other words, owning the thing is losing the gearer money.

The gearer gets into this situation because they figure that the asset will eventually pay off in one way or other: in particular, that the revenue will exceed the costs, and thus produce a net income (ie 'positive gearing'); or that someone will buy the thing and pay more than what the gearer paid and lost along the way, thus producing a capital gain (ie 'speculation').

Australia's present tax arrangements are unique in the world for their generosity to negative gearers, by allowing them to deduct their losses from their other sources of income, thereby reducing the amount of income tax they pay.

So, while the gearer waits for their pay-off, their losses are effectively subsidised by other taxpayers. For those gearers waiting for a speculative pay-off, it's even more generous: capital gains are taxed at half the rate of other forms of income (from work, or rent for that matter).

As a result of this policy, over a million Australians own negatively geared rental properties, particularly for speculation. That's a lot of people borrowing and spending up big – which is bad for affordability for would-be homeowners. By pursuing speculative gains, they've also changed the shape of the rental market, by favouring established, high-value, high-rent properties  – which is bad for affordability for tenants. And they keep declaring losses against their income to the tax office: $12 billion in 2010-11, or about $4 billion in income tax forgone – which is bad for the Budget.

So what might the Liberals do? They could do as most other countries do: allow losses from a class of assets to be deducted only from income from that class of assets. Other forms of income would get taxed appropriately, regardless of how much of it was spent on a loss-making property.

Or they could do as the Henry Review recommended: apply a discount to net income from assets, whether positive or negative. This would mean losses could still be set against other taxable income, but the losses would be smaller, and would not reduce taxable income quite so much; it would also remove the preference given to speculative gain-seeking over income generation.

Or they could limit the generous treatment of negative gearing to new-built rental properties only... or limit it to five years of losses... or any number of things to improve what is currently an insane policy for making housing less affordable and homeownership less accessible, at public expense.

But at this point our reading between the lines becomes hazy. We await the Liberals' real housing policy with interest.