For the budget – do something positive (about negative gearing)

From today’s Crikey:

Kevin, will that be two terms, or four?

The government has got its eye in, and been blooded through the odd embarrassment. It needs to ask itself whether it wants to be a two term government? Of course it does. But what about becoming a four term government?

Australians like to give their new governments a go.  So if you’re a first term government all you have to do is avoid really big mistakes, and keep the photo ops coming.  But the second term gets harder. And the one after that?  Well you’re fighting that nagging “it’s time” feeling in the electorate.

The Government needs to invest its political capital now doing things that might not please the electorate now, but leave it with something to show for having stuck with you.

To embrace a ‘four term strategy’ the Government needs to come up with some measures that show it means business.  It needs to find measures which don’t cause a riot but which generate growing dividends in the out-years. And not that they matter in the short term, but the cognoscenti will be even more impressed if the reform takes advantage of the specific short term circumstances we find ourselves to build for the long term.

There are plenty of such policies around. Here’s one.

With the RBA’s anxious about a housing bubble, now’s just the time to do something about negative gearing.  It’s much more targeted than raising rates and it will raise bucket-loads of revenue.  Here’s how to minimise the political flak.

  1. Don’t abolish negative gearing. Just introduce a cap on it so that it’s targeted at bona fide investment. So you could say that negative gearing will continue but only up to a cap of – say – 20% of the interest payments on any asset (or 30 or 40 percent if you’re a chicken).With lots of rents at 5% of value and interest rates of 6 or 7 that would be ample for most bona fide investors.  But it would pick up the rorts where huge amounts are written off with interest carry forward and various other tricks.
  2. ‘Grandfather’ all mortgages for – say – 5 years so that no-one’s expectations are upset and in five years rents should have risen to take any reasonable negative gearing into the black.The beauty of doing it right now is that you can’t do it when house prices could start falling as you’ll get the blame. There’s one further snag.  Rents are rising and will keep doing so.  This was the reason the ALP Government reversed its original decision to abolish negative gearing in the mid 1980s.
  3. So you also allow unlimited negative gearing for the first five years investment in any new building – channeling investors’ money where we want it – into building new homes.

Voila, you’ve added another string to the bow of your housing affordability strategy.

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Bruce Bradbury
Bruce Bradbury
11 years ago

I think increasing capital gains tax on property is a more important priority. (Preferably all property, but at least investment property). The expectation of future capital gains provides a powerful feedback loop that leads to bubbles. I don’t think the association between the Howard capital gains tax reductions and the housing inflation that followed in the early 2000s was an accident.

derrida derider
derrida derider
11 years ago

I reckon any government that touches tax policy on housing at the moment would be taking a massive risk.

We are going to get a bust – and a big one – sooner or later and there’s every chance that the bust will occur within a couple of years of you making your changes. You will then (unfairly, but that’s not the point) be blamed for the rest of their lives by all those bankrupt mums and dads. It’ll be your opponents who’ll find themmselves musing about a four-term government.

Kevin Rudd is a ridiculously cautious man who’ll run a mile from this sort of risk. He’ll prefer to hold the tiger by the tail and hang on and hope for the best.

11 years ago

Actually, at least with respect to Melbourne, I don’t think it is so much about new land to put under houses as putting more houses on current land, à la Docklands, the new Camberwell development, etc. This appears to be amazingly hard to do.

The outer limits of Melbourne are already a long long way out. I expect that similar considerations apply to Sydney, at least.

I agree with NG on housing prices but DD on Rudd.

11 years ago

As a property investor I certainly would not like changes to negative gearing. Most are under $300,000 in value as I bought cheap. I currently have 5 homes while building by 6th home which will be my family home for some time.

I see a very big danger on the horizon with the RBA pushing up interest rates. The RBA is using the wrong tools to cool the housing market and it will fail and drag parts of australia into recession with it. Living in WA I see the huge amounts of money being made by the resources boom. Interest rate increases to these people making $140,000-$200,000 per year makes little difference to them. If ever they need more money they only need to ask for more shifts due to the massive skills shortage in this sector. The real pain will be felt by normal australians in NSW, VIC, TAS and areas of QLD,WA who do not benifit from the massive wage increases. It will be these people who lose there homes, jobs as te RBA hikes rates. The mining sector will continue to boom regardless of the RBAs rates and will even expand as it is driven by offsure demand.

The RBA rates increases will not slow the housing boom but in fact it is already fueling housing prices higher and higher. Tell me what happens when constuction of new homes is slowed as it is now, housing construction is in decline as of March. But wait isnt the RBA telling us we need lots more homes as the housing shortage is fueling the bubble. But increaseing interest rates have driven away investors and new owner occupiers so the home construction is in recession even without the april rate increase.

So now with less housing being constructed, but the population still growing what happens to house prices. Up and up we go and the RBA is adding fuel to the fire. Interest rates is the wrong weapon to use here, it will only make the housing bubble worse. Cashed up people from the resources boom or foriegn migrants with money/ over seas investors will all continue to buy housing regardless of rates until they reach the stratsosphere 12%-13%. By which time nearly every other family/business in australia is closed and the only business left is BHP/Rio tinto.

The governments need as a short term measure to release large amounts of land in Vic/NSW/WA/OLD to stabilise land prices. The Federal government should offer tax breaks to home contruction under $500,000, maybe even $400,000. Make it attractive so investors flood the market and give home consruction a real push along. With alot more land and home contruction there is less competition for homes, meaning lower price rises. When a resource is plentiful prices are normaly lower. Until this happens up and up prices go until we do have a bust, but it will repeat again and again as long as we have a shortage of housing vs population.

In the medium turn the government needs to encourage construction of medium ro high density living. The 1/4 acre block is no longer relevant in our cities. In the footprint of perth for example you could fit the city of Mumbi which has 20 million people, perth has less then 2 million. Its not the land its how we use it. Tax credits, no stamp duty, grants all these options to encourage people to buy medium density living over the 1/4 acre block.

Interest rates are not the solution, all the RBA is doing is hurting the wrong segment of australia. Its using a sledge hammer when it needs a scapel.

11 years ago

Sydney still has a fair bit of industrial and ex-industrial sites along the Parramatta river (Silverwater for one) that could make a major dent in the housing market if it was all released at once.

That would be suicide for whichever government signed off on it, but a fortune for the developer in question. So there’s a chance that sufficient corruption could cause it to happen.

More likely, it will continue to dribble out over time to just keep the price rises at a politically convenient rate.