Negative gearing could be axed and the banks muzzled, all because the mild David Murray has gone postal.
Ok, looks like it’s hat eating time… again.
Looks like Decembers become quite a month for it. Keep this up and I’ll be so full of hats come Christmas time I’ll have no room for pudding.
First up we had Kelly O’Dwyer and the review of foreign property investment hitting some nails on the head. None of it was rocket science, but these are the times we live in – if the government gets past petty political point scoring and comes up with some good policy recommendations, then Jon Giaan eats his hat.
And now we’ve got the Murray Financial System Inquiry. It’s an “independent panel” led by former CBA CEO David Murray, tasked with looking into the health of the financial sector.
As I wrote all the way back in March this year:
It is ridiculous to have the former head of the CBA heading an inquiry into banking. You don’t put alcoholics on the liquor licensing board.
Putting Murray in charge of a banking inquiry was a bit like putting Chopper Reed in charge of an inquiry into bikie criminal gangs.
The inquiry itself also came from a half-hearted pre-election promise by Joe Hockey to do something about banking that no one on the inside thought he was serious about.
And so my view, like a lot of others, was that the inquiry would be a complete waste of time. The government didn’t want to rock the boat of one of its largest donors, and the expectation was that a loaded panel would come up with some safe, bank-friendly recommendations.
Whoops.
Murray and his mob have gone postal, and have actually gone out and made some pretty sensible suggestions that kick the banks square in the profitability gonads.
And no one saw it coming. Certainly not this little hat-eater.
Murray has gone and delivered some crackers.
The first sacred cow he hit with a stick was negative-gearing and capital gains tax concessions on property.
The government must be livid. ‘We asked you to look at the banks and you’re throwing tax policy back in our face?!?’
This is a bit of a game-changer. Negative-gear and the capital gains tax concession are one of those divisive topics that everyone’s got an opinion about. I personally don’t have a strong opinion about it because negative gearing is a dud strategy, so it’s not going to have a big impact on my game.
But a lot of people have had a crack at it over the years. But no one of David Murray’s stature, and definitely not from the high-pulpit of a financial system inquiry.
The government will be desperately hoping this issue will die a quiet death. It’s been in the too-hard basket for years. Murray’s salvo is going to make it harder, but never underestimate the length politicians will go to, to do nothing.
Here’s what Murray actually said:
Capital gains tax concessions for assets held longer than a year provide incentives to invest in assets for which anticipated capital gains are a larger component of returns. Reducing these concessions would lead to a more efficient allocation of funding in the economy…
For assets that generate capital gains, the tax treatment encourages leveraged investment, which is a potential source of financial system instability. Investors are attracted by the asymmetry in the tax treatment of expenses and capital gains, where individuals can deduct the full interest costs of borrowing (and other expenses) from taxable income, but only half of their long-term capital gains are taxed. The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment in housing…”
Radical, radical stuff.
I wonder if Murray meant to drop such a bombshell. He was talking about negative gearing and the CGT concession under the umbrella of a broader point – that banks have abandoned business and over-loaded themselves on mortgage lending, and that’s created a systemic risk for the economy.
Yep, that’s the sound of a parliament of chins hitting the floor.
Did he really just say that? He was meant to just shuffle a few bits of paper around. Not unleash carnage like this. Again, in his words:
“Housing is a potential source of systemic risk for the financial system and the economy… Australia’s banks are heavily exposed to developments in the housing market. Since 1997, banks have allocated a greater proportion of their loan books to mortgages, and households’ mortgage indebtedness has risen. A sharp fall in dwelling prices would damage household balance sheets and weigh on consumption and broader economic growth. It would also reduce the quality of the banking sector’s balance sheets and the capacity of banks to extend new credit, which would compromise the speed of a subsequent economic recovery…
This concentration, combined with the predominance of similar business models focused on housing lending, exacerbates the risk that a problem at one institution could cause issues for the sector and financial system as a whole.
Boo-ya!
That’s right. Not some, but ALL the banks have gorged themselves on housing debt, which has amplified the risks associated with any shock to the housing market.
And his solution – banks need to increase their capital ratios. Ouch. That means locking more money up, which means less profitability.
Someone get this guy on a leash!
This puts the government in an incredibly awkward position. Most of Murray’s recommendations are sensible, and they’re going to be difficult to ignore. The banks will be lobbying desperately to kill these reforms (it’s already started), but coming from a former insider, these criticism are going to be difficult to deflect.
And the government won’t want to put their paymasters at the banks any further off-side – not after being forced to back-flip on the FoFA reforms, which to be honest, already make them look stupid. But they can’t just ignore it.
Anyway, a lot can happen between an inquiry and legislation, but watch this space. 2015 is going to be an interesting year.
Maria says
I agree that the major banks should be subject to the same capital ratios that the smaller regional banks are subject to. We keep on complaining about “a level playing field”. Well, this would make it a level playing field.
Australia is not the only country in the world that has negative gearing and/or CGT advantages for investors. Removing the advantage of a reduction in CGT will surely lead to a reduction in investment properties. Current housing supply is below market demand and with a reduction in investment properties, who will supply the shortfall? The goverment? I don’t think so…
DB says
How about we stop importing 400,00 immigrants a year for a year or two and there will be no housing shortage.
A Weatherstone says
Good write up Jon.
Kathy says
This inquiry into banking is long overdue in Australia. The so called “too large to fail” banks can and do act with impunity to increasing risks because they know the government (ie. the TAXPAYER) will bail them out. Well, if the recommendations are adopted, this will be no more.
This has made the banks fat and lazy and only looking for the quick return by overloading their loan books in property instead of helping and nurturing real businesses, which are the actual powerhouse of the economy. We’re not going to get rich selling houses to each other, and if the rest of the economy is tanking, who is going to buy them anyway.
The banks are bringing back “sub prime” high risk mortgages. But this time the government has a large debt rather than a surplus should GFC mark II hit. Will they be in a position to bail out any banks, even if they want to?
And negative gearing needs to be severely rolled back or abolished. Of the 3 or so countries that still have negative gearing, I believe Australia’s is by far the most generous.
It’s also good superannuation and particularly the fees charged by funds are under scrutiny as well.
We will wait and see if this government actually has the intestinal fortitude to bring about much needed reform in the banking and superannuation sector.
KatMD says
There are enough houses and apartments for everyone to live in… except as with income, the inequitable distribution of existing stock since boom times saw a mushrooming of waterfront and city properties that were mostly short-stay and holiday rentals. Our neighbour’s place has been on the market for nearly 12 months. As long as the developers got their pickings! Down with negative gearing on residential property! Right said Dave! People with super savings and shares will pray that our banks continue their prosperous business with Fed gov’s blessing.
John of Wollongong says
Piffle
James Glanvill says
I don’t care whether you think Negative Gearing is a ‘dud’! As that idiot Keating found out the hard way, if you drive investors out of residential property, then it falls back on the government to provide public housing. The poor cop it in the ‘gonads’ because rents go through the roof due to lack of supply of rental properties. Stuff around with negative gearing at your peril! What they should do is give investors a set tax rebate of say, $10,000 per year, whatever the value of the property and give low income earners $100 per week ‘Rent Assistance’. This would encourage investors to provide properties at the cheaper end of the market, as they would get the same rebate as for a dearer property. Therefore, the government would be able to provide a fully maintained property, through the ‘private sector’ for $15,000 per year. Much cheaper than the billions wasted in providing ‘public housing’ through the wasteful bureaucratic Housing Ministries at state and federal levels, as at present. An added bonus would be that all the lowlife scum who presently trash public housing would eventually find themselves, either lifting their game or, living in the gutter where they belong. The whole scheme could be run through the ATO/Centrelink as at present. Imagine the BILLIONS saved not having to pay all those public servants shuffling paper in the public housing departments!
Simon says
Can we abolish trailing commissions also?
John from Perth says
Seems like all these experts calling for the abolition of negative gearing have short memories. When negative gearing was abolished by Hawke/Keating 1985 housing investment dried up, rents went through the roof and welfare groups demanded that negative gearing be brought back or have big increases in provision of government housing. That was why in 1997 the rules were changed back. It will cost the government more in increased welfare housing costs than they will save from abolition of negative gearing.
If the government want more investment in businesses then they need to provide incentives for businesses. At the moment businesses have to compete with imports while the Australian dollar is high against companies that get around our tax laws. It is laze government to just keep heaping more taxes on people trying to invest and save for their retirements. Doing away with negative gearing will mean there will be less self sufficient people in retirement and more demands on welfare and everyone will be worse off.
Leo says
China! Is it China?
We sent all our manufacturing to China and put our own employees out of work.
When you have to replace a good job with a part time job or a substitute job with less pay, where will the money come from to buy a home. As a mature age Aussie, I have been watching this country head towards a brick wall for many many years. I remember having a discussion with a friend long ago back in the days when Bob Hawke was head of the unions. My view then was that unsubstantiated wage rises would put us and other western countries incomes too far ahead of the rest of the world to be able to trade effectively. How do you trade with someone getting $2 a day and you get $150 a day or more.
Eventually everything gets unbalanced and manufacturers look to produce more cheaply. If China did not open their doors to the west, maybe India or another lower payed country would have. So, we were always going to arrive in our present situation. Lower pay, less real jobs. The reason we are still considered a safe haven for investment purposes, is mainly our reasonable political stability along with a finance system that is better regulated than that of the rest of the world. We have a responsible system that will not let debtors just walk away without recourse. We are not warring amongst ourselves like many others, and our neighbors cannot easily exert political or physical pressure on us. Another plus is we have a reasonably stable weather pattern. We don’t get battered annually by mother nature.
None of this may seem relevant to the situation we are in today, but let me say every step you take in life will lead you to somewhere. We may not have known the destination of the steps we took many years ago, but each one has brought us all here. I believe this country and the western nations are going through the transition to better fit with the rest of the world. China will eventually become too expensive too manufacture, and the world will look to another cheaper production line. It happened to Japan and so it goes. My advice, do not spend too much time in despair, rather take more time to look how you may better your own position in life. That may mean you need to help others improve their position, so be it. Aside from the government assistance and the banks lending to investors who claim negative gearing, the vendors of houses will always look to get the ‘best’ price they can, not just a fair price. This in itself with the assistance of real estate agents will continue the upward price of property. If you don’t think it’s right, then when you next put your home on the market, do a favor to the poor unfortunates that are struggling to buy today, drop your price. Take less than the agent says he can get, take less than you think it’s worth. If enough people do this long enough, after a while property will be a dime a dozen and we can all have one, or two, or ?.
I agree with Murray, the banks should be on a more level playing field if only to encourage competition. This will make money cheaper to borrow and safer. I also believe that Financial Advisors have a lot to answer for. They have caused a lot of damage to people and should have even greater accountability along with the rest of the finance sector.
Can I add here that I don’t care a lot about politics, but those people who think Tony Abbott is no good, that he breaks promises and is a liar, then I guess you want Kevin Rudd or Julia Gillard or even Bill (Mack the Knife) Shorten back in control and borrowing and spending money with out any care or concern as to how we pay back the debt. Would you run your home budget like that and expect to get ahead in life. People want the handouts but not the responsibility for paying for it. If not for the budget surplus before the GFC then this country would be screwed. So, why are people complaining when Australia got off almost scott free.
I feel blessed to be an Aussie, we really have a good life here. It’s not perfect, but it’s a bloody good life nevertheless.
Thanks Jon for a great year.
Cheers all, Merry Christmas
John of Wollongong says
“The first sacred cow he hit with a stick was negative-gearing and capital gains tax concessions on property.”
Without these two concessions the supply of rental accommodation will dry up and rents will rise dramatically. Government will not be able to provide enough social housing and there will be unrest. Mum and Dad investors will only have banks or the share market so they will just travel or vegetate.
This would be the silliest interference with the property market I can imagine.
Shimma says
Conundrum, the Labour government tried to ban property negative gearing during the 90’s (I think I’ve got the right decade..). Result – lower investment in housing, less sales, decline in values, decline in housing production, decline in housing availability, decline in affordable housing…a vicious circle. Can’t see it happening again any time soon (not that the cash up foreign investors give a stuff)..
Charles says
Remove negative gearing & CGT concession will significantly improve the funding of general economy. More people will be able to afford a home, less will rely on government. Australia & NZ are the only 2 countries with such tax skew policies in place, thus more people rely on government housing.
brett duck says
what no mention of foreign investors lifting the price of resential property
Gail says
That’s a big one the Chinese developers get there money in China at 2% and less .. Come here buy develop and force housing prices out of reach .. The great Australian dream of owning your own home.. Is becoming just that a dream ..
Charles says
Chinese investors are all rich communists, they don’t need to burrow. They use cash. But I don’t think they are the major driver, negative gearing & CGT concession is the one, that’s why Jon gave it a big “OMG.”
Charles says
Chinese buy far more, 100s times more in America than in Australia
Mark says
Mark
The sooner retail banking is separated from investment banking in this country, the better off we will all be.This includes negative gearing.