Speaking to Mortgage Business sister title NestEgg following the release of confidential documents from the Treasury department on Australian Labor Party housing policy, vice-chancellor’s fellow at the University of Tasmania Saul Eslake said that the negative gearing debate has always been a question of politics rather than economics.
Speaking to NestEgg, the independent economist expressed little shock at the release and content of the documents, but said that he was surprised that the government would “have been so willing to so flagrantly contradict the advice they were getting”.
He explained: “Treasury would have been giving the government what it thought was its best professional assessment of the likely impact of Labor’s policy. Governments often ignore Treasury advice; Treasury doesn’t always get everything right.
“I think the government’s motivation was primarily what economists might call product differentiation… they wanted to have something that would be a clear difference between the Coalition and the Labor Party over taxation. So, I think it was essentially politics, not economics, that drove this.”
He continued: “At any given point in time, there are at least 10 million people who own one property. Of those, there’s around something like 2.5 million who own at least two properties, and the last thing they want is the government to do things that would make housing cheaper. They like the government to do things that make housing more expensive.
“Even the dumbest of our politicians can do that math, as the Americans say: One hundred thousand votes for making housing cheaper, or 10 million votes for making housing more expensive.
“So, the government is consciously putting the interests of investors above the interests of first home buyers and the electoral arithmetic helps you understand why they do that.”
Mr Eslake said that FHBs’ wishes are also short-lived (due to them wanting the government to ensure that house prices increase after they have got on the property ladder), adding to the attraction of protecting investors over those buying their first property.
Investors ‘have squeezed FHBs out of the market’
The economist went on to highlight that there has been a trend of declining home ownership for young Australians, suggesting that investors could be partly to blame.
He said: “[T]he home ownership rate has been declining since 1966 and the 2016 census was the lowest it had been since the 1954 census. In particular, home ownership rates had been declining among people aged from 25 to 45. The home ownership rate among people aged 25–45 at the ’16 census was the lowest it had been since the 1947 census.
“Now I’m not saying that investors are the only reason for the declining home ownership rate among young or even middle-aged people… to some extent it’s changes in the choices that present generations of people in their 20s and 30s have made compared with the choices their parents or grandparents… lower interest rates are part of it, easier availability of mortgage finance is part of it, high rates of immigration are part of it.
“But one of the things that I think is compelling is that in the early ’90s, first home buyers and investors each accounted for about 18 per cent of total lending for housing, with the other 64 per cent going to existing owners who were trading up.
“By the middle of the present decade, that is, about 2015, the share of housing finance going to first home buyers had fallen to 11 per cent while the share going to investors had risen to more than 50 per cent.
“I think that is unambiguous and incontrovertible evidence that investors had squeezed first home buyers out of the market.”
Mr Eslake went on to highlight that while some may say negatively geared investors are “just mums and dads trying to get ahead”, they “ought to stop and ask themselves of whom are those so-called mums and dads seeking to get ahead?”
“The answer,” Mr Eslake said, “is their own children or their children’s peers.”
In conclusion, Mr Eslake said that the ALP’s proposed policies on housing would not have had a markedly different impact on the market than we have been seeing under the Coalition government, due to the impacts of APRA’s crackdown on interest-only and investor loans.
“The share of housing finance going to investors has fallen back from over 50 per cent in 2014–15 to less than 45 per cent in last six months or so. So, clearly that has had some impact in dampening investor demand and that was the intention of Labor’s policy. It was not to prompt investors to sell… but it was intended to dampen new investment, so probably the effect of Labor’s policy would have been similar to that which has been achieved by APRA’s measures.”
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.