As Reserve Bank governor, Phil Lowe should probably get used to having his words misrepresented by politicians on all sides. In February, Lowe’s comment that “we need to make sure our tax system is internationally competitive” was “seized on” (“seized on” being one of those terms that only journalists use, like “slapped down”, “fled”, “blaze” and “revellers”) by Treasurer Scott Morrison as vindication of the government’s company tax cuts. Two weeks later at a parliamentary hearing, Lowe offered a rather more nuanced take, suggesting a global race to the bottom on tax wasn’t a good idea and that “dividend imputation makes a tax cut effectively irrelevant for Australian firms”.
Yesterday it was Labor’s turn to “seize on” Lowe’s comments on Wednesday night that land supply was the primary driver of housing price rises but that taxation also played a role.
That, naturally, wasn’t what Malcolm Turnbull wanted to hear at a time when there’s been a major mood shift on housing, driven by the growing number of key stakeholders who support some change to negative gearing and capital gains tax concessions — if not exactly those proposed by Labor — and the financial regulators again intervening to force lenders to pull back on housing investment loans. So yesterday — having inexplicably scheduled a media event with the backbench’s most prominent supporter of negative gearing reform, John Alexander — the Prime Minister was forced to do some tap dancing:
“Well, I’ve read what the Reserve Bank governor said last night, and he made the point — and he made the point four times — that the real problem we have with housing affordability, and that’s particularly in this city, is supply, lack of supply that for too long supply of new dwellings have been constrained so demand had overtaken supply and you’ve got as a consequence a big increase in prices … The speech needs to be read and he makes the point that we all do, that this is essentially one where we need to get more supply, more development, more dwellings being built so that supply meets demand.”
There’s raging agreement about the lack of supply — especially in Sydney — and that’s where Turnbull would prefer the debate to be, because despite having promised that the budget would be about housing affordability, there’s nothing the Commonwealth can do about supply, beyond throwing money at local councils to provide more infrastructure for newly released land.
Alas, Turnbull was misrepresenting Lowe. Lowe was discussing the popularity of interest-only mortgages, which are one of the main targets of the current ASIC/APRA crackdown. “There are a couple of factors that help explain the popularity of interest-only loans in Australia. One is the flexible nature of Australian mortgages. Many people with interest-only loans make significant payments into offset accounts rather than explicitly paying down principal. This flexibility, which is of value to many people, isn’t available in most countries. A second factor is the taxation arrangements that apply to investment in residential property in Australia.”
Nor is this the first time Lowe has had a crack at taxation — in February, he argued that addressing the interaction of negative gearing and capital gains tax would “would take some of the current heat out of the housing market”. A different Phil has been providing an insight into the government’s muddled thinking on all this. At the Financial Review, Phil Coorey has been providing regular updates on how a proposal to reduce the concessional treatment of property under the capital gains tax is faring within government, with opposition led by Finance Minister Mathias Cormann.
The irony is, the government’s mates at the big banks have dropped this problem on Turnbull. It’s the banks that decided to ignore APRA and ASIC’s December 2014 tightening on investment loans and that have lifted interest-only loans to 40% of new loans. It’s the banks that have kept lax lending standards that take little account of customers’ living expenses in the event of a rate rise. It’s the banks that appear to have joined in the widespread assumption that home prices will always go up.
The government needs to deliver tax changes to reduce the taxpayer subsidy to property investment. Its refusal to countenance them increasingly looks like wilful denialism. Apart from anything else, it might help save the big banks from their own greed.