Andrew Leigh

E&OE TRANSCRIPT

RADIO INTERVIEW

ABC 774 MELBOURNE

MONDAY, 15 FEBRUARY 2016

SUBJECT/S: Housing affordability; Labor’s plans to improve fairness in the tax system.

RAFAEL EPSTEIN: It's a simple question: is negative gearing the tax break we need to change? Dr Andrew Leigh joins us to talk about this, he's the Shadow Assistant Treasurer and the Shadow Minister for Competition as well in Bill Shorten's Shadow Cabinet. Good afternoon.

ANDREW LEIGH, SHADOW ASSISTANT TREASURER: Good afternoon Raf, how are you?

EPSTEIN: I'm good. Andrew, have you got a negatively geared property yourself?

LEIGH: I don't, no. Just the one home, I'm afraid.

EPSTEIN: Because there's a ton of federal politicians who do, including I think, one of the Nationals Senators who owns about 42 properties. I just wonder if it gets in the way of politicians considering this properly?

LEIGH: Lucky for some, yes. It's worth thinking about the fact, Raf, that some of these politicians wouldn't be negatively gearing because they would be living in a Canberra residence and a residence in their electorate. But put all that to one side, the reason we're doing this is because it has become harder than ever for young Australians to break into the property market. The share of young Australians owning their own home is down 25 per cent from where it was in the early 1980s, when it used to cost you three times the average incomes to buy a home, rather than six times average income as it does today. The typical Melbourne home now costs more than $700,000 and so many people are saying: well, even if I've got my own place, what about my kids? How are my kids ever going to break into a property market like this? So by encouraging investors to move into new housing if they want to continue negatively gearing, and by grandfathering the existing arrangements, we get a boost in housing supply but without making anyone worse off who has made a decision under the existing rules.

EPSTEIN: Aren't you punishing everybody who is already negatively gearing because the re-sale value now goes down?

LEIGH: I'd be very surprised if house prices were actually going to fall, Raf. What we're talking about is –

EPSTEIN: Even the Grattan Institute, who support your policy, they still say prices will go down as a result.

LEIGH: That's not right, Raf. The number you're quoting from the Grattan Institute models a different policy from the one we've announced. In particular, it's one that doesn't have the grandfathering arrangements in place that say that existing investors aren't affected. But let's just consider how fast prices are going up at the moment. Last year in Australia house prices went up 11 per cent, at a time when wages have only gone up about 2 per cent. I was speaking to a young couple at one of my street stalls the other day who said they felt they'd just about scraped together enough for a deposit, and then the housing market took off again. Now they're living with the in-laws and thinking about raising a couple of new bubs underneath somebody else's roof. That's not the Aussie dream. This is a builder and a teacher who, by rights, ought to be able to get into the housing market. But we've got a system that gives more assistance to people buying their 10th home than their first home.

EPSTEIN: So you're saying prices won't go down at all?

LEIGH: I wouldn't expect that there's going to be a decrease in house prices. Our hope is that this takes some of the heat off the top of the market.

EPSTEIN: It just seems an odd guarantee to give – the market is volatile, isn't it?

LEIGH: The market is certainly volatile, Raf, but you've asked me what my expectation is and I've told you that. The fact is that the existing arrangements stay: if you've already got a negatively geared property, you won't be affected by Labor's change. If you buy one before 1 July next year, you won't be affected by Labor's change. So this is a policy that will steadily take effect over time. If you want to negatively gear under a Labor Government after 1 July next year, we simply ask that you help the whole community by buying a new-built home that adds to housing supply – and by the way, helps support construction jobs as well.

EPSTEIN: Andrew, if I can just go through that once again: everyone who has got a negatively geared property at the moment, if you win government it means I can't sell the property I already have. So everybody who has already bought a property faces selling it in a market where the next person cannot negatively gear it. Surely that's going to have a big impact? One of the big reasons the market is booming is because I can re-sell it and another investor can negatively gear it the same way I did. You're only grandfathering the purchase I've already made – why won't the value go down? It seems logical.

LEIGH: Raf, what we have at the moment is a market in which prices have been growing gangbusters. That has been driven, in part, by negative gearing but there's also other factors that are driving the market as well and they will continue. We haven't been building enough homes in Australia over the last decade. We've got the fastest population growth in the advanced world, and housing supply hasn't kept up with that. So negative gearing isn't the only factor out there in the housing market. Our hope is to take a little bit of the heat of it in order to allow a young couple – like a nurse and a police officer – to actually buy their first home. Negative gearing and the capital gains tax discount overwhelmingly benefit the best-off in the community. About half the benefits of negative gearing go to the top tenth; about two-thirds of the benefits of the capital gains discount go to the top tenth. And those two policies together, the experts tell us, have acted to ensure that we lose revenue as a community but also that it's harder and harder for young Australians to buy their own home.

EPSTEIN: It is worth it if it's only bringing in, I think, about $120 million a year over the foreseeable years – which are the next four – even by your own independent calculations? That's not much money. Is it worth it in terms of the overall budget, given the potential risk?

LEIGH: Raf, what we have to do is take not just a three- or four-year analysis, but a decade-long analysis. One of the problems in Australian politics has been this short-termism. Bill Shorten and Chris Bowen and the Labor team want to take a long view about this; to put in place big structural savings. This is $32 billion over the decade, and yes, the benefits do come in the latter years. If the Prime Minister wants to criticise us for that, this implicitly means he thinks we shouldn't be offering grandfathering. That we shouldn't be saying to existing investors: they won't be affected.

EPSTEIN: Well, it doesn't quite mean that. It might just mean he thinks you've got a bad idea. He might have a different way of dealing with negative gearing, like limiting the number of properties or quarantining your income. It doesn't necessarily mean he wants to make it retrospective.

LEIGH: If he has a change to negative gearing that raises most of its revenue in the first four years, then that's a change that's going to affect existing investors. That's not the Labor way. Labor doesn't believe that we ought to be affecting investors who've made decisions in good faith, and possibly stretched themselves to buy an investment property. It's why we're announcing it now, more than a year before it would take effect under a Shorten Government. It gives people time to adjust, but it also recognises that these arrangements aren't fair and they're not sustainable. The typical teacher or nurse claims a couple of hundred dollars a year in negative gearing deductions. The typical surgeon or anaesthetist claims around $4,000. The benefits of this are accruing to a small group within society and, as with every tax loophole, we have to ask: how does it benefit all of us? Not just those who are currently using it, but the community as a whole.

EPSTEIN: The figures are clear in terms of the volume of money going to the top; still, there is a very broad range of people on very average incomes accessing this. They must like it and see it as a path upward. I think at the moment only about 7 per cent of people getting into the market are new home investors – aren't you cutting off access to one of the few ways people on an average wage can create a bit of wealth on their own?

LEIGH: Raf, the overwhelming benefit of negative gearing doesn't go to people on the average wage. The figures I have in front of me suggest that for people in the middle of the distribution, they're getting a couple of per cent of the capital gains benefit and a couple of per cent of the negative gearing benefits.

EPSTEIN: I'm not disputing where the money is going, but people are doing it; they like it; you're taking that away from them.

LEIGH: We're not affecting existing investors. If you've bought under the existing arrangements, you won't be affected by Labor's changes. But what we're saying is that this is a policy which, as you correctly note Raf, sees 93 per cent of negatively geared investors buying the existing stock. If you're trying to boost the housing supply, that means this policy has a 93 per cent failure rate. We want people to help us in expanding the housing stock in Australia; improving the number of construction jobs and making it easier for young Australians to buy their first home. I think that's a pretty reasonable trade-off for people who want to continue negatively gearing, which is, let's face it: not an arrangement that exists in most advanced countries. The ability to deduct investment losses against wage income is an unusual feature of the Aussie tax code. We say you can keep on doing it but –

EPSTEIN: Can I ask you about that: why not simply change that? Not everyone may be aware that with negative gearing you can offset your real estate costs against your income somewhere else. Why not change that? Why not just limit the number of properties? Those are two ideas, by the way, that people are speculating the Government will take up. What's wrong with those two ideas?

LEIGH: You certainly could limit the number of dollars or the number of properties, Raf. Then you've got a measure that would add to the budget bottom line and close off a tax loophole. But you wouldn't have a measure which would also tick the housing affordability box. The reason that Bill Shorten and Chris Bowen have chosen to go down this path is because of the benefits in improving the total housing supply in Australia. We need more homes built, and this policy will deliver that. It ought to be applauded by anyone in the construction industry who wants to see us add to housing supply and wants to see an Australia in which it's easier for everyone to buy a home. I get a bit worried when I hear people talking only about mum and dad investors, and forgetting that there's plenty of mums and dads who'd just like to buy one home. While we recognise that those investors have made decisions in good faith and so they won't be affected, we want to make sure that from 1 July next year negative gearing adds to the supply of new homes.

EPSTEIN: Can I just ask finally, the poll numbers are improving a little for Labor with the Fairfax poll today, but still Malcolm Turnbull's popularity and preferred Prime Minister numbers eclipse Bill Shorten's by a very, very long margin. I think most people in Canberra simply expect the Coalition to win. Do you think it's actually possible for Labor to win the election this year?

LEIGH: Absolutely, Raf. That's why we're out there arguing for good policy ideas. The announcement over the weekend is entirely in the Whitlam/Hawke/Keating tradition of reforming Labor. We're thinking up ideas which are not easy populism, but actually make structural, long-term changes.

EPSTEIN: The ideas aren't giving Bill Shorten any greater lift, people don't think he's going to be a better Prime Minister. You've got all those ideas, not much result.

LEIGH: Look, this is Bill demonstrating his policy credentials. If anyone thought that we were playing small target game with policies, that idea ought to have been blown out of the water over the weekend. We now have around $100 billion of savings and revenue measures which improve the budget bottom line over the next decade. That is well ahead of what the Government has and suggests that the policy leadership in this country is clearly coming from the Opposition with the Government frankly, in Scott Morrison's case, just flip-flopping around like the former Property Council executive that he was.

EPSTEIN: Andrew Leigh, thank you for your time.

LEIGH: Thank you, Raf.

ENDS

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