Dissecting Labor’s plans for housing affordability

Finance & Fury Podcast

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)

1. 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;

1. Demand side – Looks at affecting consumers
   • Making people not want to buy property to drop prices
2. Supply side – Looking at affecting supply
   • Number of properties increases

What are the policies:

1. 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

2. 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.
3. 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.
4. 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
5. Increased foreign investor fees and penalties
   • Increase application fees - double the foreign investment application fees Liberals introduced.
     • Property of