There's only one thing standing in the way of lower interest rates, and the Abbott government has just been handed a way to deal with it.
When the Reserve Bank board gets back from its summer break on February 3 it will be told that the economy is weak and (on the latest figures) getting weaker.
It will be told that the government is unable to do what's needed to boost it. Hemmed in by the deficit and its talk about the deficit it won't boost spending and, aside from promised tax cuts due next July, it won't cut taxes further. (Credit where credit is due. At least Joe Hockey says he won't cut spending further in next week's budget update. That would be "in the current circumstances quite irresponsible," he says.)
So it's up to the Reserve Bank.
Another cut in its cash rate from 2.5 per cent to 2.25 per cent would boost the economy by giving mortgage holders access to more cash (an extra $51 dollars each month for someone on a $350,000 mortgage) and make it cheaper for businesses to borrow.
And it would make Australia a less attractive place for foreigners to park money, knocking out a support for the high dollar and making it easier for Australian businesses to compete with imports and sell overseas.
Normally it's fear of inflation that holds the Reserve Bank back from cutting interest rates, but not this time. Both price growth and wage growth are disturbingly low.
But not house price growth. Since house prices bottomed in 2011 the typical price has climbed a frightening $100,000. For much of this year prices have been climbing at an annual rate of 11 per cent in Melbourne, 16 per cent in Sydney. Just recently the pace has slowed, with prices actually slipping in Melbourne. The latest annual figures are 8.3 per cent in Melbourne, 13.2 per cent in Sydney...
The Reserve Bank is worried about reigniting what it regards as an unsustainable boom in house prices and pushing them to the point where they collapse and cause financial damage.
It's the only thing standing in the way of it cutting rates.
The Bank's governor Glenn Stevens has been thinking out loud about ways to restrain house prices in order to make get room to cutrate cuts possible. Importantly he has discovered that ordinary homebuyers aren't the problem. In the past year the amount borrowed by personal investors to buy property has climbed at almost twice the rate of the amount borrowed by owner occupiers. Investors now account for $1 in every $3 1 in every 3 dollarsborrowed to buy property. Stevens is thinking about imposing tougher lending standards and capital requirements for lenders to investors but leaving owner occupier loans alone.
And now the Murray financial system inquiry suggests something else...
On Sunday it pointed its finger at the tax system. In its words: "The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment in housing".
EverSince the Howard government halved the headline rate of capital gains tax in late 1999, investors have enjoyed a low rate of tax on the profits they make when they sell properties while being able to deduct from their taxable earnings the full interest costs of the borrowing they use to make those profits.
The Murray review calls the tax treatment "asymmetric".
For well-heeled households it has made investing in second, third and even fourth properties a no-brainer.
As Macquarie Bank economist Rory Robertson told his clients at the time, "since September 1999 it is almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages or salaries".
By becoming landlords they have provided renters a useful service, but by elbowing would-be owner-occupiers out of the way in order to buy properties on which to run up interest bills they have also been creating those renters.
Since Howard changed the rules, the proportion of households forced to rent has climbed from 27.2 per cent to to 30.3 per cent.
House prices have run way ahead of household incomes ever since.
Doubling the rate of capital gains tax to make it the same as the tax paid on other income would take the wind out of the investor housing market. If the government wanted to merely do it to new housing investors (leaving existing investors untouched) it would take out the wind slowly. Or perhaps it could do it only to investors who buy existing properties rather than ones built from scratch. The Murray inquiry isn't prescriptive. It wants capital gains tax and negative gearing investigated by the tax inquiry Abbott is expected to announce this week.
Abbott could give the Reserve Bank cover by announcing at the same time as the tax inquiry that he is inclined to act against negative gearing. He could say that when the new rules are decided on they will apply from December 2014, deflating the housing market straight away and making it easy for the Bank to push down rates.
It would help the Bank help him, and quite possibly allow much lower interest rates. And it would rake in more tax as well.In The Age and Sydney Morning Herald
. Is negative gearing responsible for soaring house prices?
. What were they thinking? The tax heists that made us a nation of losers
. Why the Reserve Bank board is poised to cut