Tax concessions for some or a home for others?

Government faces stark choices on housing in lead up to Tuesday's budget.

By Dr Stephen Duckett

May 8 2017The Federal Government faces stark choices – subsidising investment properties for some or reducing tax concessions so that others can afford a home, while also tackling the growing problem of homelessness, says economist Dr Stephen Duckett, who is Director of the Grattan Institute’s Health Program and Vicar’s Warden at St Peter’s Eastern Hill.

The Federal Budget on 9 May will again document what the Government values in the spending choices it makes.

The lead up to the Budget has seen the typical debates, kites being flown and leaks. As with all Budgets, this Budget will settle internal debates in Government about priorities, at least for another year. One particular debate that has been waged in public has been about housing, framed as “housing affordability”. The framing is important as it is shaped by, and helps to shape, public perceptions of what the key issues are, and what policy options might be relevant.

Housing affordability in recent months has been framed as being about young families being unable to get a start in the owner-occupied housing market.

As with any market, the housing market is determined by the interplay of supply and demand. Developing a coherent policy on this topic in Australia is made more complex because states control many of the supply levers and the Commonwealth controls many of the demand-side levers.

The good news is we know what might work in improving housing affordability and what probably will not. The bad news is that evidence about what works often comes a distant third or fourth place behind what might be politically feasible in the current government, what makes a good sound bite, and what might be affordable.

Unfortunately for the Commonwealth Government, which appears to wear the political responsibility for housing affordability, the largest impacts come from state actions. These include increasing middle ring housing density, increasing density on transport corridors and boosting green-field supply.

The Commonwealth, though, has levers of its own, in particular tax levers. A recent Grattan Institute report on negative gearing (“Hot property”), shows that the single biggest demand-side intervention that might improve housing affordability is to reduce demand by investors through tax changes. Many wealthy tax-payers have investor-owned properties and these receive favourable tax treatment in that reduced tax is paid on the capital gain made when a property is turned over. In the meantime, any losses made against the cost of borrowing to pay for the property and the costs of and renting it are deductible against other earned income (“negative gearing”).

Even the Property Council has suggested that the current discount against tax (“Capital Gains Tax discount”) is too high at 50 per cent and should be reduced to 40 per cent. The Grattan Institute has gone further and recommended that it be reduced to 25 per cent over five years.

Negative gearing concessions should also be wound back, either restricted to newly built properties or by removing claiming property losses against wage income.

These changes would save taxpayers more than $5 billion a year. Housing affordability would be improved by taking some investors out of the market – thus reducing pressure on prices. Those investors who stay in the market would have lower costs of borrowing, hopefully passed on to tenants as lower rents. The same stock of housing would be available so that current renters who can now afford to buy would do so, freeing up space for new renters.

Sounds perfect, so why isn’t it policy? $5 billion extra tax revenue means that some tax payers are paying more in tax, some paying a lot more. The benefits from the existing tax arrangements fall unevenly – wealthy tax payers get disproportionately more of the benefit. You can be sure that they made their voices heard against this proposal. Meanwhile the people who will benefit – essentially low and middle income young people and families – have a quieter voice in the corridors of power.

The choice is stark – between a subsidised investment property for some against a new home for others. What should a good government do in these circumstances? Jeremiah gives us pointers to good and “wicked” rulers. In chapter 22 we read the story of King Jehoahaz who built a palace with spacious upper rooms and panelled in cedar. The contrast is made with the better example of Jehoahaz’ father Josiah who “gave justice and help to the poor and needy” (22:16; New Living Translation). Should we prioritise those who benefit from the tax concession or give justice to the relatively poorer who cannot afford to buy?

Housing affordability: take 2

But is making housing more affordable for new home buyers the only way to frame the critical housing policy issues today? Walking down the streets of Melbourne, or indeed regional cities, everyone can see a different housing story, one of homelessness. More people are living on the streets of our cities than ever before as rooming houses and other places which used to provide accommodation close. Public and social housing has not kept pace with demand.

Many Christian groups have stepped in to help alleviate the real problems faced by homeless people. At St Peter’s Eastern Hill the Lazarus Centre breakfast program, conducted by Anglicare Victoria and supported by their staff and parish and other volunteers, serves hundreds of people each week. The clientele is changing too as women and young people turn to the streets as a better option than often very hostile and dangerous home environments.

Homeless people are the true voiceless. Their needs do not attract the same political attention as young, clean, middle class families looking to buy a new home. Political attention is only garnered for the homeless when it becomes too much of an embarrassment to step over them in their cardboard shelters, and seeing them sleeping under building overhangs and under bridges.

Unfortunately it is probably too much to hope that both sides of the housing equation could be dealt with simultaneously. Government should reduce the tax concessions to help housing affordability, and use some of the money saved to create housing options for the homeless.

Budget 2017 will display the outcome of internal contests about priorities. It will reveal what is prioritised, and implicitly, what is not. It will display the value choices that have been made. As Christians we should be ever mindful that these budget choices – both the government budget and our own personal one – are signals to the world of what we value. “Truly I tell you, whatever you did for one of the least of these brothers and sisters of mine, you did for me.” (Matthew 25:40).

Dr Duckett is a Fellow of the Academy of the Social Sciences in Australia.