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Thursday, December 01, 2016

How to help first home buyers, while keeping negative gearing

Malcolm Turnbull made the wrong call defending negative gearing in order to get re-elected. He needs to crawl back slowly. There's no shortage of people on his own side telling him to.

The latest is Jeff Kennett, who was Victorian premier just as negative gearing began to take off at the end of the 1990s. On Wednesday he tweeted: "It is inevitable that the rules affecting negative gearing will change – have a responsible bipartisan discussion in 2017." Victoria's present Treasurer, Tim Pallas, will echo Kennett at a round table of treasurers on Friday.

"It's all very well the feds telling us we need to boost supply, but whenever we do, their negative gearing and capital gains tax rules direct much of it away from first home buyers towards investors," he says he will tell the meeting.

The NSW Coalition Planning Minister and Premier agree with him, saying they can't see why someone buying a second house should get a tax deduction a first home buyer does not.

Graph the proportion of home loans going to investors since the early 1990s (which is as far back as the figures go) and you'll find out it began at 16 per cent, then climbed to almost 40 per cent, before soaring to nearly 50 per cent after the headline rate of capital gains tax was halved and negative gearing exploded. Would-be owner-occupiers (let's call them genuine home buyers) went from having not much competition to having half of all the money lent for housing amassed against them.

Then things improved for a while, especially during the global financial crisis when investors baled out, before lending to investors grew again and soared back way above 50 per cent to a record 55 per cent, at which point the Australian Prudential Regulation Authority (APRA) intervened to impose tougher rules on banks lending to investors, knocking the proportion back to 44 per cent. But it's growing again, and is again approaching 50 per cent.

John Alexander is the Coalition MP who chaired the inquiry in which the Reserve Bank's head of financial stability explained that it was "a truism that if an investor is buying a property an owner-occupier is not".

The inquiry was sidelined in the election campaign but has been reopened and will report by Christmas. Which is where it gets fascinating. Turnbull and Morrison are genuinely concerned about the inability of ordinary Australians to buy houses and are open to ideas.

So long as they can stick to their stated positions that they won't change the capital gains and negative gearing rules, they would be more than happy to introduce changes that would hold back investors and reskew the housing market toward genuine buyers at more reasonable prices, returning the Liberal Party to its historical position of championing a home ownership rate that was the envy of the world.

Within the Coalition's housing work group Alexander has been tossing around an extraordinary scheme derived from the hearings that has the potential to guarantee it the next election.

It's in three parts: The first would require APRA to continually adjust the rules governing how easily banks could lend to investors, each month; just as the Reserve Bank adjusts interest rates each month. But rather than targeting consumer price inflation as the Reserve Bank does, APRA would target house price inflation. Too much – perhaps more than doubling every 10 years – and it would make it harder to lend to investors, too little and it would be more generous. Home price growth would become predictable rather than scary.

The second part would be to advantage genuine buyers. Right now they are required to pump 9.5 per cent of their wages into superannuation. Instead they could allocate that 9.5 per cent to pay off the principal (but not the interest) on home loans, meaning they probably wouldn't need deposits and could start buying early. The usual criticism of any measure that advantages first or genuine homebuyers is that it would push up prices leaving them no better off. But this wouldn't, because of the role of APRA in restraining loans to investors to restrain price rises. It would just tilt the market back towards owner-occupiers.

The super funds would be upset, especially the union-dominated default funds, but they are not the Coalition's concern. The money put into owner-occupied housing instead of super would buy those who chose to do it more security than could super. Which brings us to part three.

Because part of the homes would be owned as "superannuation", that part would count toward the pension means test, keeping a lid on the cost of the pension. And because steadily increasing home prices would be as good as guaranteed, those increases could be borrowed against to fund fortnightly payments in retirement. For someone who bought a house at 25 and then retired at 65, the payments would be big.

It's a genuinely innovative idea, and it needs a lot more discussion. But if Turnbull could pull it off, or something like it, he would stand a chance of becoming the greatest Australian prime minister since Menzies. That's why he is listening.

In The Age and Sydney Morning Herald