The Treasury Secretary John Fraser was recently found wanting in the Senate Economics committee on the most controversial tax in the country. When asked by Senator Peter Whish-Wilson what would happen to rents if Negative Gearing was removed, he provided the following answer:

Treasury Secretary John Fraser: Uh… I’m testing my memory and I’m looking… Nigel’s too young to uh… when the negative gearing was wound back in the… 80s? [Yep]. Uh the reason why it had been brought in was to increase the supply of rental housing. And I think I was overseas at the time… I think the evidence was such… [rents increase]… Yeah, and so it was brought back.

Senator Which-Wilson: Uh… sorry so that’s why it was brought back in – to increase the… My understanding was that maybe it was Sydney and Perth there was some structural shortages at the time which lead to higher…

Nigel Davis, Treasury official: I think you’re correct senator…

Then the Minister for Finance quickly jumped in with

Mathias Cormann: In any market there are a number of… obviously inferences that uh… play on it at any one point in time. Obviously the judgment at the time was uh… that in the circumstances the effect was as has been described.

Perhaps we are being harsh on Mr Fraser. But for the highest economist on the land not to know the intricacies to one of the most pertinent issues relating to housing affordability, a subject he has strongly talked about in the past, strikes at just why those locked out of housing feel so frustrated.

Watch the video for the full context.

Rents fell in the majority of cities when Treasurer Keating enacted Negative Gearing reform in the mid 80s. Sydney and Perth had previously low vacancy rates, so rents did marginally increase there. But that is no reason to say that they increased nation-wide.

Please email Treasury Secretary John Fraser with a link to Saul Eslake’s demolition of this argument at our 122nd Annual Henry George Commemorative Dinner.

As interest in reforming Negative Gearing reaches fever pitch, please read our former Research Director Gavin Putland’s work on the issue, when he first proposed limiting NG to new housing in 2003.

Despite some of the current scaremongering, can the property lobby recognise that if NG is limited to new housing, it will do anything but harm the construction industry? Limiting NG to new supply will provide a spur for new construction.

Part of the Economics committee discussion centered on why there was still talk of a housing shortage when rental yields were at record lows.

Senator Whish-Wilson: Yeah that was my next question. Okay. Um… Is there any indications there that is a housing shortage in supply – would you agree with that, with other reports?

Nigel: (Exhales deeply)

Senator: Because I’m interested from that as to why rents are not increasing at the same rates… as housing prices if we’ve got a shortage?

Nigel: So… Uh… (Removes glasses while staring at folio) I think… Um… So in the September quarter which is the most recent data commencements were at record levels. And… Um… Uh… All the indicators are there’s a solid pipeline of projects. One of the differences with this housing cycle compared with um… uh… past housing cycles is the importance of apartments in the housing cycle, and they tend to have a longer – for obvious reasons they have a longer lead time between um… uh… I guess developers um… starting their process and actually getting their apartments… available for occupation, occupancy. And so we’ve seen this cycle, the supply hasn’t – supply response has been a bit slower than previous cycles – it’s largely a result of that… So we are seeing quite a pipeline.

Senator: I saw you shaking your head there Mr Fraser, do agree with that it’s a bit abnormal that rents aren’t increasing at similar rates?

Fraser: I was being whimsical… to be honest… when Mr [Nigel?] mentioned the apartments. You see in Melbourne I think uh… There’s been a… massive increase in the number of apartments in the Docklands and other areas. Uh… The rents uh, yes do look uh… very low… I… I don’t know the answer, but it does suggest there’s (nods emphatically)… a good supply of rental apartments. I should mention the harper um… report… the Harper reform measures include trying to increase the supply of land and infrastructure to address housing shortages which um… I think certainly do exist… particularly for first home buyers. And that’s uh… very much a focus of some of the discussions in the [kiffer?] meeting.

The Victorian land supply pipeline is undoubtedly the most aggressive in the nation’s history. But still prices have barely budged. Instead the land size for housing in new developments has been crunched to keep the per metre pricing at unaffordable levels.

We can only hope unbiased analysis is produced by Treasury to analyse why the housing supply mantra is failing to deliver affordable housing in Melbourne and the rest of the nation.