The government runs a scare campaign as it ignores the risks of leveraged real estate.
Sometimes economic setbacks are difficult to predict. Other times, the warning signs are there for all to see. News that household debt in Australia is now 100 per cent higher than the total earnings of all households is yet further confirmation that Australia’s leverage levels are firmly in the latter category. And yet the federal government continues to refuse to act.
We have the most generous property tax concessions in the world. Should we be surprised that we have one of the highest household leverage rates in the world? As well as improving housing affordability and improving the budget, dealing with tax concessions that encourage higher and higher levels of household debt is another reason to reform negative gearing.
I am always careful and sober in my language about the risk because the economy doesn’t need alarmist politicians portending meltdown. But we also should not ignore the risks, and for a good 18 months now we in the opposition have been warning of this growing problem. The latest warning on household leverage comes from the highly reputable Bank for International Settlements, which argues that “high and rising” household debt poses risks to macro-economic stability and economic growth. The BIS points out that Australia’s household debt, standing at more than 120 per cent of GDP, is higher than virtually every other advanced nation and double most other economies. This follows warnings from other organisations such as the OECD.
As I said in my speech on The Case for Financial Stability late last year, it’s not the government’s responsibility to dictate to households and businesses whether they should borrow money and how they spend it, but it is the government’s responsibility to ensure that policy settings are appropriate and do not adversely distort economic decision-making. And on this measure the government continues to fail. Despite the bombardment of advice from well-respected organisations to reform tax concessions such as negative gearing because of their distorting effects, the government has simply turned a blind eye.
The Reserve Bank, the IMF, the Grattan Institute and the government’s financial systems inquiry have argued forcefully that tax concessions such as negative gearing distort economic decision-making and encourage leverage in the economy. As far back as 2014, David Murray, who chaired the financial systems inquiry, put up in red flashing lights that negative gearing and capital gains tax concessions were “major tax distortions” which tended “to encourage leveraged and speculative investment and housing is a potential source of systemic risk for the financial system and the economy”.
In these pages yesterday, Adam Creighton called it a “a distortion of savings” and “far better to use savings to build and innovate than buy established houses”. And more recently, the IMF said “the tax system provides households with incentives for leveraged real estate investment that likely amplifies housing cycles”.
Record-high household debt has real macro-economic implications and has been receiving increasing attention from the RBA. As the RBA states in its most recent Financial Stability Review, “highly indebted households are more likely to struggle to repay their debts, or substantially reduce their consumption, in response to a negative shock”. If the latest household spending figures are anything to go by, we may be starting to see a more cautious consumer. In the recent September national accounts, household consumption posted its worst quarterly performance since the global financial crisis.
Labor’s reforms to negative gearing and the capital gains tax discount — part of a broader housing affordability package — are partly designed to address these macro-economic and financial stability concerns. Labor’s reforms of these tax concessions will protect existing investments by grandfathering property purchases made before the commencement of the policy; that is, it will not be retrospective, but it will discourage the use of excessive leverage in the housing market.
And now after two years of concealment, the recent release of 2016 Treasury analysis under Freedom of Information laws confirms it does not believe that reforming negative gearing as Labor proposes will crash the property market, contrary to what the government scare campaign would have us believe. A much bigger and growing economic risk is household debt, a risk that the government has simply ignored.
Reforming negative gearing achieves a rare trifecta of positive policy outcomes. It’s good for the budget, it spreads the opportunity of home ownership by putting first-home buyers back on a level playing field, and it reduces the distortions in our tax system that encourage excess leverage.
With a government bereft of leadership, it will be left to a Labor government to deliver change.