Andrew Leigh

URBAN TASKFORCE AUSTRALIA DEBATE, SYDNEY

TUESDAY, 21 JUNE 2016

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I acknowledge the traditional owners of the lands on which we meet today, and pay my respects to elders past and present. Thank you to Chris Johnson and the Urban Taskforce for organising today's debate on an issue of central importance to this election. I acknowledge my fellow debaters – my reformist teammate John Daley, and anti-reformers Nigel Stapledon and Angus Taylor.

One of the great things about an election is that you get a chance to meet such a broad range of people. I was in Maleny recently, doing a town hall meeting with our Labor candidate for Fisher, Bill Gissane. A tradie stood up – a real one – to ask me about housing affordability. His name was Tony, and he is a building worker, with four children in their twenties. Tony told me that he worries that none of them might ever be able to afford a home of their own.

Tony's kids don't live in a big city, but the problem is even worse in our capitals. At one of my regular street stalls in Gungahlin, a couple came up to me – a teacher and a builder – worried that they wouldn't be able to pay a mortgage and raise a family. They'd done the sums, and figured that they could only afford the mortgage if neither of them took a break from work. But if she wanted to take some time out of the workforce to help raise a child, they wouldn't be able to buy a home.

How did we get here? Since 1936, Australia has allowed wage earners to deduct interest losses against salary. It's not a system that exists in many countries. You can't do it in Britain or the United States, for example.

But the problem arose in 1999, when the Ralph Review recommended cutting the capital gains tax rate. The Ralph Review didn't contain a word about real estate, and focused instead on what it predicted would be a surge of investment into innovative companies. Peter Costello went ahead and halved the capital gains tax for assets held for over a year.

The result can be seen from looking at the taxation statistics on the net income of landlords. Within a few years we went from a situation in which landlords had been net taxpayers to one in which landlords were among the largest recipients of tax handouts in Australia. Over the past decade and a half, net rental losses have been around $4 billion to $10 billion per year.

The consequence is that Australia's tax policies encourage people to behave differently from the investing rules we teach young people. Our tax code encourages people to buy loss-making assets in the hope of making a capital gain. Back in the day, we used to call that speculation. And our tax code encourages people to concentrate their investments in a single asset class – property. This is at odds with the basic principle of diversification, for which Harry Markowitz shared the 1990 Nobel prize in economics.

Today, Australia has the lowest rate of home ownership since the 1950s. Young Australians are more than 10 percentage points less likely to own a home than a couple of decades ago. If you go back a few decades, there was no difference in home ownership rates across income quintiles. Today, low-income Australians are significantly less likely to own their homes.

Sydney is now the second-most unaffordable city in the world, as measured by house price to income ratios. Melbourne is the fourth-most unaffordable. I’m sure you all read the Australian Bureau of Statistics figures that were released at 11am today. They show that the past 12 months have seen a 9.7 per cent growth in house prices in Sydney, a 9.8 per cent growth in Melbourne, and 6.8 per cent nationally.

That's well below the rate of wage growth, which is now at a 30-year low. In Geelong recently, I was chatting with Nathan, a young bloke who'd like to buy a home. His problem is that as soon as he comes close to scraping together a deposit, the prices rise again. I'm pretty confident Nathan's wage didn't rise 9.8 per cent last year.

In the lending statistics, we can see investors crowding out first home owners. In the early-1990s, the amount of lending to the two groups was similar. Today, the value of investor loans is four times as large as the value of loans to first home owners.

Where do the benefits go? Put together the capital gains tax discount and negative gearing, and you'll find that half the benefits go to the top tenth of the population. Surgeons are 16 times as likely to be negatively geared than nurses, and 100 times as likely to be negatively geared as cleaners.

Only 7 per cent of negative gearing goes to new homes. If this is a policy aimed at increasing the housing supply, it has a 93 per cent failure rate.

Over recent years, the calls for reform have come from across the political spectrum. Among those who have pointed out the risks of negative gearing and the capital gains tax discount are Saul Eslake, Cassandra Goldie, Chris Richardson, the Murray Review, the Henry Review, the Reserve Bank of Australia, Jeff Kennett, Joe Hockey (in his farewell speech to parliament last year), and Malcolm Turnbull (in 2005).

Labor's policy is to phase out negative gearing on all except newly built homes from 1 July 2017. Existing assets, and any new ones bought before 1 July 2017, will be treated under the existing rules. But from 1 July 2017, the capital gains tax discount will be cut from 50% to 25%, and – except for new built homes – investment losses will only be allowed to be deducted against investment income.

The Federal Liberals believe that we should require foreign buyers to purchase new homes so that they add to the housing supply. At a state and territory level, Liberals have changed the first homeowner grants so that they are only available for new built homes. Again, that's because they want recipients of first homeowner grants to add to the housing supply. Labor simply believes the same policy should apply to negative gearing.

Labor's negative gearing policy is about closing a tax loophole. As Harvard's Martin Feldstein has pointed out, closing loopholes is both more equitable than cutting spending, and more efficient than raising taxes. Loophole-closing characterises our approach to other areas of tax reform too, such as superannuation and multinational taxation.

Over the decade, the savings from Labor's changes to negative gearing and the capital gains tax discount add $32 billion to the budget bottom line. Importantly, our savings build over time, like money put away in a bank account. By contrast, the Coalition's company tax cut costs more and more over time. Like a stick of dynamite with a long fuse, it really blows the budget in the mid-2020s.

According to independent modelling from the McKell Institute, Labor's changes will encourage new home building, creating around 25,000 new jobs in the construction sector – for real tradies.

As you welcome Angus Taylor to the stage, I'd like to lay down three challenges for him to answer today.

1. Does Angus personally benefit from negative gearing? For the record, I don't.
2. Will Angus admit that negative gearing is a regressive tax break, that goes disproportionately to better-off Australians?
3. Can Angus outline the 'excesses' in negative gearing that Treasurer Scott Morrison referred to back in February?

I look forward to Angus's answers, and eagerly await your questions.