Nov 9, 2018
Welcome Finance and Fury’s Furious Friday episode.
Today we’re answering the question we asked on Wednesday about
Labor’s polices and their promises to lower housing prices/increase
affordability.
If you haven’t checkout out the episode, it’s probably worth
while just to go back and have a listen as it gives a bit of a
background on the history of the Australian property market, why
the price increases have been happening over the last 20 years, and
some alternative ways to create a solution.
Labor’s plans for housing affordability
Increase financial stability, reduce homelessness and boosting
jobs (this is mainly straight from their website). Both parties are
running on similar issues here. They’ve done their demographic
research, but they have different ways of doing things.
What Labor have proposed (8 policies in
total)
- A big ones - Reform on negative gearing and capital gains tax
concessions
- Limit future negative gearing concessions to new housing – you
will only be allowed to negatively gear on a new build.
- Reduce the capital gains tax discount from 50 per cent to 25
per cent (existing may possibly be grandfathered)
- I’ll break these down in detail after I quickly run through the
other policies first, as these two seem to be the ones that
everyone is paying attention to.
The following is copied from Labor’s own website explaining the
reasoning behind these policy changes. Im going to run through this
with you line by line…
‘Higher income Australians are able to use these tax subsidies
to reduce the income tax they pay, primarily through negatively
gearing property and the capital gains discount.’
This is true – So far so good. They DID forget to mention
however that anyone can access these strategies – it just takes
time to build some wealth first.
‘These subsides are concentrated in the highest income deciles,
as low- and middle-income Australians are more likely to spend
their income on consumption, whereas higher income Australians are
able to accumulate capital and use tax benefits to reduce the
amount of tax they pay on their income.’
Again, very true – But this is a choice, there are many higher
income earners don’t accumulate capital and they spend it on
consumption, and they are likely to be paying more than double the
tax of a low-income earner, even after deductions.
‘Ultimately, a dollar of tax avoided by high income Australians
is an extra dollar of tax paid by all other Australians’.
This is where it started getting loopy – It is starting to make
it seem the economy is run on a collective quota system, which
isn’t true. Communists tried that. Australia’s tax system is
progressive i.e. the more you earn the more you pay. About 80% of
the income tax collected in this country comes from the top 30% of
income earners.
‘Labor, believes that the tax system should be designed to boost
jobs and grow the economy. The tax system acts a form of traffic
lights in the economy, directing investment within the
economy’.
This Central planning. The more you extract from the productive
sector, the less productive they’re going to be.
‘In setting tax policy, therefore, we should be designing a
system that green lights investments on activities that boost
economic activity, and underpin the efficient allocation of
resources. Existing policy arrangements that direct resources
to unproductive investments and speculative markets should be
re-considered.’
They are saying here that they want to design policies that
reduce the incentive to invest for yourself and give the government
more money through taxation so that they can “invest” it for you.
Since they know better than you how you need to be looked after,
right?
Moving onto the policies - Will any of these actually help? Who
knows?
There are two ways of looking at the world;
- Demand side – Looks at affecting consumers
- Making people not want to buy property to drop prices
- Supply side – Looking at affecting supply
- Number of properties increases
What are the policies:
- Limit direct borrowing by self-managed superannuation funds
(SMSF)
- This might help, but may only be a drop in the ocean
- SMSFs can borrow to invest in assets on a limited recourse
basis
- Loans in SMSF increase from about $2.5 billion in 2012 to more
than $24 billion today.
- Worried that the growth will cause volatility in super and
increase home prices
- Here’s some perspective - $21.4bn is borrowed each month just
by owner occupied individuals
- SCORE: this will have little effect
- Facilitate a Council of Australian Governments (COAG) process
to introduce a uniform vacant property tax across all major cities
- This is taxing a property or land being held in Australia by
people that don’t live here
- Exists in QLD currently and is also being trialled in Victoria
– 1% of value each year
- SCORE: Meant to punish people who are holding onto vacant
property – Not sure, think this might hurt us a bit.
- Establish a bond aggregator to increase investment in
affordable housing
- A Shorten Labor Government will establish a bond aggregator to
help community housing providers access cheaper finance for new
affordable rental housing.
- The housing bond aggregator will directly source cumulative
funds from wholesale markets on behalf of community housing
providers, by issuing bonds to private investors. Funds raised by
bond issues can then be loaned to providers.
- Lower cost? Bonds have fixed rates – prices change as rates
change.
- These also looks a lot like mortgage backed securities where
low income household mortgages become the underlying asset on these
bonds – if those fail then the bonds are worth nothing. This is a
risk.
- The Government provides the funding on the projects the
Government chooses (State planned housing)
- SCORE – Supply may increase but the quality of supply won’t –
supply will be in urbanised areas. This could also be fuelling an
artificial bubble here – over supplying for no demand.
- Boost homelessness support for vulnerable Australians – Same
sort of policy for both Labor and Liberals – Building crisis
accommodation
- SCORE: Liberals at $323m, Labor at $88m – This is for a good
cause, but doesn’t play a part in the bigger picture of housing
affordability
- Increased foreign investor fees and penalties
- Increase application fees - double the foreign investment
application fees Liberals introduced.
- Property of <$1 m = $5,000 to $10,000, $1m - $2 m- $10,100
to $20,200, $2m - $3m - $20,300 to $40,600
- Increase financial penalties for breaches of foreign investment
rules
- For foreign buyers that acquire new or existing dwellings
without approval – Increase the criminal penalty to $270,000, and
$1.35 million for a company.
- SCORE: Won’t slow investors down – I’m sure savvy investors may
get around this – they could start an Australian Run Unit
Trust/Managed Fund to hold the investment and buy units. This is
just extra regulation as far as I am concerned.
- Getting better results from the National Affordable Housing
Agreement
- A Labor Government will work with the States and Territories to
negotiate a new National Affordable Housing Agreement (NAHA)
- This “includes new performance and accountability measures” - a
new approach is needed as some current targets were missed (don’t
know which ones though)
- “Labor will work with the states to drive better outcomes and
performance that will see real reductions in homelessness and
housing disadvantage”
- Labor will also seek to strengthen measures in the current
agreement across the housing affordability spectrum, including,
Planning reform, Inclusionary zoning, Accelerated release of state
and territory government owned land for housing development
- SCORE: No idea – Just putting more control and regulations onto
the issue
- Re-establish the National Housing Supply Council and re-instate
a Minister for Housing
- Increase control over the housing sector,
- re-instating a Minister for Housing and Homelessness whose
remit will be to coordinate all aspects of Commonwealth housing
policy
- re-establish the National Housing Supply Council to provide an
ongoing independent advisory body on boosting housing supply.
- Provide advice on how state and national policies are tracking
against housing policy objectives;
- better tracking and accountability of funds spent through the
National Affordable Housing Agreement.
- Provide advice on Commonwealth land holdings and opportunities
for development release to boost housing supply
- SCORE: Can’t see it doing much except creating more employment
in the Government
A recap: So far all that we have had is increasing central
planning and regulations, fining people, or taxing people more.
This just leads into the new reforms relating to negative gearing
and reducing the CGT discount. Will this solve the problem?
I’m playing the Devil’s Advocate here; If they are allowed to
speculate that it will solve the problem, I can speculate that it
might not!
- Negative gearing – this is a hard one to call – I’ll speculate
and say it might not help out that much if anything it might hurt
- Grandfathered for existing arrangements – What will it earn in
tax for the Government in the future?
- Plus, available on new builds also – Which is 100% of the
supply increase going forward
- SCORE: It will change people’s behaviour – Existing property
investors will likely hold their property to keep benefits of
gearing
- Less stock of existing properties for sale, pushing prices for
new property up further if supply doesn’t keep up
- Create another artificial bubble of overvalued new apartments
for the negative gearing benefits
- Capital gains reduction – again, this is a hard one to call
- I’ll speculate that people will just hold onto their
investments longer rather than incurring any CGT.
- I know personally that investments with CGT are often chosen
last when selling as tax will cut into a lot of your profits. I
would be much more likely to actively trade shares if there was no
tax – If a share gains big I hold it even if I know (no way to
know) it is likely to decline than continue rising.
- Just create another housing supply decrease – People will avoid
at all costs to crystallise a gain for longer periods
It is impossible to tell. It’s doing the same thing but just
more of it, along with over complicating it at the same time. I
don’t think it will work as intended.
The fundamental issues of the property price increase are still
an issue
- High population growth
- High concentration of Urbanisation
- Taxes already being high – Making them higher and more complex
won’t help
Again, thanks for listening!