Thursday, March 3, 2016

Housing, tax and growth

The long road to sensible tax reform has taken an awkward turn today, with Federal Treasurer Scott Morrison holding out a much maligned and now discredited report as evidence that Labor's proposed changes to negative gearing (and capital gains tax exemptions) would take a wrecking ball to Australian housing. Aside from Labor leaping to its own defense, the BIS Shrapnel report - commissioned by a mysterious "private client" - has prompted a couple of good responses. See, for instance, this piece by representatives of the Grattan Institute, and the joint statement from ACOSS, National Shelter, the Australian Youth Affairs Coalition and the National Association of Tenancy Organisations (of which TUNSW is a member).

Much has been said about negative gearing since Opposition Leader Bill Shorten announced Labor's proposal in mid-February. We've kept relatively quiet on the matter, because we've been waiting to see whether the Government will come up with their own vision for reform. Recent indications suggest they may pass, although Scott Morrison has not yet made this official.

We'll get onto it, though, because even throughout all the furore not much has been written about what Labor's proposals will mean for tenants - other than the usual guff about rents going berserk and landlords burning down houses before suffering any loss without generous taxpayer funded subsidies. Well, okay, maybe we made that last bit up, but with some of the commentary going on out there, you'd be forgiven for thinking such civil disobedience is truly on the cards.

Of course, there have been exceptions. Some very well considered articles have been produced over the last three weeks - one such being a piece in The Conversation penned by Professor Gavin Wood. Wood took a look at the short- and long-term implications of Labor's plan, should it become a reality, and suggested that we might expect a bit of a step backwards before things start to improve. That's a reasonable assumption given the housing market - and indeed the whole Australian economy which relies so heavily upon house price speculation - will have to adjust. It's this adjustment we should be focusing on, rather than whether or not landlords will try to pass on the "costs" of losing their tax breaks by trying to increase rents en masse - some will, others wont, everyone will have to adjust.

Wood's article concludes:
Many believe that repayment and investment risks carried by heavily indebted home buyers played a central role in precipitating the global financial crisis. Tax concessions that favour taking on debt exacerbate those risks. If Labor’s proposals succeed in attracting attention to these and other structural problems that plague Australian housing markets, they will have a much wider significance.
Meanwhile, the Australian Bureau of Statistics has just released a report showing that economic growth for the December quarter was higher than expected - coming in at 3% against a forecast of 2.4%. One of the key drivers of this growth was household consumption - ordinary people spending ordinary money on ordinary things like food, fuel and shelter. There's a problem, though, because incomes are on the decline as higher-paid jobs in the mining sector are replaced by lower-paid jobs in services and retail. Which means, for the last few months at least, our economy was driven by consumers tapping their savings, or - and this is far more likely - the equity in their property holdings. In other words, taking on more debt to spend on consumption, while hoping that further house price rises will pay for it in the long-run.

This is an unsustainable way of achieving growth, but it is also grossly inequitable. It's not hard to see who the losers are in such an economy, even while the good times last for those in the winners' circle. Perhaps it's time we did make some of those adjustments.

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