Saul Eslake, Negative Gearing and Policy Promise


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Saul Eslake at the 122nd Henry George Commemorative Dinner

Saul Eslake at the 122nd Henry George Commemorative Dinner, with Karl Fitzgerald

Renegade Economists radio show #430

Read the show notes. Subscribe to the leading Georgist weekly podcast.

Karl Fitzgerald: And welcome the Renegade Economist with your host, Karl Fitzgerald. And, my, oh, my, hasn’t it been in the news, negative gearing, there’s been a huge change in sentiment not only from both political parties, but from the media itself. And who better to hear it from than Saul Eslake, yes,, one of the nation’s leading economists. Alright, let’s step into things.

When you hear about negative gearing today hopefully most of you know that this is the ability to write off losses on your property investment against your income. That gives property investors the ability to outbid everyday mum and dad homebuyers and it’s been going on for too long. And when you hear the term called “grandfathering” that means allowing what’s already happened to continue and just starting off from a certain date as in July 2017. Alright, let’s get into it.

We welcome to the show Saul Eslake, one of Australia’s foremost economists who many will know through his work at the Grattan Institute, the ANZ Bank and the nightly news. So Saul, welcome to the show. It’s just quite an extraordinary situation after for so many years working on negative gearing reform to see it now at the sort of policy focus level we’ve been waiting for.

Saul Eslake: Yes, in some ways, echoing Malcolm Turnbull, I’m tempered to say that there’s never been a more exciting time to be an advocate of changes to Australia’s long-standing negative gearing arrangements. I feel, and I suspect you do too, that you’ve been banging your heads against a brick wall of Treasurers for more than 20 years, remembering that Wayne Swan was no more willing to contemplate any changes to negative gearing than were Peter Costello or John Howard before him, or Tony Abbott or, until his last day in parliament, Joe Hockey after him.

Yet now we have a situation where the opposition has put forward some very significant changes to negative gearing arrangements, they’re not perfect in my view, but they would represent a significant improvement on what we currently have. And for its part the government seems to be sending off signals that it’s prepared to contemplate cracking down on what it has thus far mysteriously described as “excesses and abuses” in the negative gearing system, so even they might be prepared to do something as well. And all of a sudden it does seem as though at least some change is in the wind, no matter what happens to the outcome of the next election.

Karl: And certainly when you look at the headlines, there are pieces on The Australian Financial Review like end the negative gearing Ponzi scheme. Of course, The Daily Telegraph and some of those sort of newspapers are engaging in the sort of scaremongering we’d expect, that any change to negative gearing is going to increase rents. Now Saul, you’ve been very prominent in dispelling this negative gearing myth. Can you please spell out to us what happened, once and for all, in the mid-‘80s when Paul Keating did curtail negative gearing?

Saul: I sometimes say in my bolder moments that the arguments that are run regarding what allegedly happened when Paul Keating temporarily abolished negative gearing between 1985 and ’87 are a contemporary example of what Joseph Goebbels is alleged to have said when he was Hitler’s Propaganda Minister, that if a lie is big enough and you tell it often enough it becomes accepted as the truth.

So routinely has the assertion that during this period in the late 1980s rents went through the roof and the government was then forced to backtrack on its earlier policy decision, so often has that been trotted out. Some years ago I went back to look at the data to seek truth from facts, as Deng Xiaoping used to say, and what the data shows is that rents did indeed rise quite significantly in Sydney and Perth during this period between mid-’85 and mid-’87 when negative gearing for property investments was temporarily unavailable, but they didn’t rise significantly in any other Australian city.

Now, negative gearing was withdrawn nationally, so if there was to have been any impact as a direct result of that change it should have shown up in all cities since they were all affected by that policy change, but they only showed up in Perth and Sydney because in those two cities the vacancy rate was unusually low. In Sydney it was actually just below 2% and in Perth it was just above 2%, notwithstanding, I should say, the fact that negative gearing had been available for 50 years prior to that point. So if negative gearing was encourages increases in the supply of rental housing over that sort of period of time the vacancy rate probably shouldn’t have been as low as it actually was, given that immigration wasn’t running all that strongly at that time.

So the assertion that is so often made about what allegedly happened in the mid-1980s and what would, so the argument runs, happen again should any government have the temerity to interfere with this tax break just simply doesn’t send a moment’s confrontation with the facts.

Karl: And this urban myth was actually repeated by Treasury Secretary John Fraser, one of the highest ranking economists in the country, last week at a Senate Economics Committee.

Senator: Just last question to finish up this, is there any evidence from work that’s been done or that you’ve seen across the board as to whether negative gearing has an impact on availability of rents and a change in policy, how that would impact rents or rental yields? It’s always rolled out by the real estate industry in discussions on this topic, but I’m wondering where we go to to get that kind of analysis and data?

John Fraser: I’m testing my memory and I’m looking – Nigel’s too young, but when the negative gearing was wound back in the ‘80s?

Male: Yeah.

John Fraser: The reason why it had been brought in, one of the reasons had been to increase the supply of rental housing and I think, I think I was overseas at the time, I think the evidence was such –

Male: That it was brought back in.

John Fraser: Yeah, and so it was brought back in.

Senator: Sorry, so that’s why it was brought back in, to increase the? So my understanding was that maybe it was Sydney and Perth, there was some structural shortages at the time which led to some underlying –

Male: So I think there were some underlying – I think you’re, I think you’re correct Senator.

Karl: And so this myth is still being propagated by those who should know better. What can we do to really put these people on notice that that’s no longer acceptable?

Saul: I was surprised by John Fraser’s comments as well. I have a lot of respect for John Fraser. He interviewed me for my first job with the Federal Treasury in 1979 and he was, in my view, rightly regarded as one of Treasury’s most capable and intelligent mid-ranking officers, as he then was, and of course he’s had a stellar career in the private sector since leaving Treasury in the early 1990s.

So I’m genuinely surprised that someone of Mr Fraser’s knowledge and capacity would make so elementary a mistake as that without first checking the facts. After all, he would have been in Treasury during that period when that policy change was made. Indeed, he might have been involved in advising both on the original policy change and the subsequent backtracking of it, and hopefully he would have been advising against it. But it does just illustrate the potency of the property industry’s campaigning on this score and underscores my earlier observation that, echoing Goebbels, if you tell a lie often enough and it’s big enough many people will come to accept it as the truth, even though it’s far from being the truth.

Karl: Well let’s step into the detail of Bill Shorten’s proposed negative gearing reforms, and that is to limit negative gearing to new housing only and also, importantly, to halve the capital gains tax discount to 25%. Now that is to come into play in July 2017. Saul Eslake, what do you see are the strengths and weaknesses of this sort of reform?

Saul: Well, the idealist in me cavils that many of the compromises that are inherent in the Labor Party’s policy. I hate the idea of grandfathering, for example, because it amounts to privileging people on the basis of birth order. Those who were fortunate enough to get their snouts in this particular trough some time ago or who have them there by the 30th of June next year will, if the Labor Party comes to office, be able to keep them there, while those who haven’t been so quick or adept will miss out on the opportunity to reduce tax and defer tax that negative gearing grants its participants.

Having said that, I’m also conscious of the saying that you can’t get the perfect to be the enemy of the good and what Labor is proposing will curtail negative gearing over time. The average property investment is typically held for about eight years, it may well end up being held for a longer period as people seek to retain the privileges associated with negative gearing that they’ll be able to retain on assets which they already hold. And that incidentally, of course, argues against the proposition that’s sometimes put as part of the scaremongering campaign that this change will lead to wholesale dumping of investment properties by existing landlords, therefore supposedly putting dramatic upward pressure on rents.

The historical reality is that almost any major change to the tax system including, for example, the introduction of the capital gains tax back in May 1985 or September 1985 by Paul Keating is almost always accompanied by grandfathering of existing investments because no politician who aspires to be in government or remain in government can really afford to be open to the charge that they’re breaching faith with investors who’ve entered into long term transactions, as they often are, under the assumption that the existing laws would remain unchanged. So, as I say, I don’t like grandfathering much, but I can understand the reason for it and the reality is that if they weren’t prepared to grandfather it they probably wouldn’t be making any change at all.

Similarly, I’m not wholly persuaded by the logic of continuing to allow negative gearing for new housing because the risk is that, unless state and local governments alter their planning and building regulations and laws, then the supply side of the housing market will still be as constrained as it is today and any effect that’s continuing to allow negative gearing for the purchase of new dwellings has in stimulating demand from investors for that kind of dwelling could simply serve to inflate the price of new dwellings. If that doesn’t happen then I suppose the Labor Party argues that this exception will encourage an increase in the supply of new dwellings and that may be so, it remains to be seen. But, as I say, if these are the compromises with the ultimate ideal that the Labor Party has felt it necessary to make in order to get the policy up in the first place, then at least what they’re proposing represents a significant improvement over what we currently have. And for someone who’s been arguing against negative gearing for over 20 years to no effect until now, over the next 20 years probably negative gearing will gradually fade away even with the grandfathering provisions.

Turning to the reduction in the capital gains tax discount from the present 50% to a proposed 25%, that’s actually a much tougher policy than most people seem thus far to have realised. You might recall that the Henry Review recommended that the discount be wound back to 40%. That figure was as arbitrary as the 50% instituted by the Howard government in 1999, but 25% represents a much less generous concession to people who make capital gains than the present system or the one that Henry’s Review recommended. Arguably it is less generous, and the assumption that the inflation remains at the midpoint of the Reserve Bank’s 2% to 3% target, it’s less generous that the system which Paul Keating instituted when he brought in the capital gains tax in 1985 and which continued until Costello changed it in 1999, whereby capital gains tax was applied at full marginal rates to the gain after an allowance for inflation instead of the present arrangement where the capital gains tax is in effect applied at full marginal rate for half the nominal gap.

Karl: Well it seems like they’re having a bet both ways and I liked the statement in The Financial Review today in an article, you were quoted regarding capital gains tax and David Richardson, from Access Economics, said, “Look, negative gearing is the symptom, but the cause are the capital gains. So targeting that is a good idea”, as you certainly agreed in that article. So wouldn’t they be having a bet both ways by implementing both these policy twists at the same time?

Saul: Yes, in some ways they are. My thinking on this question has evolved over the last couple of years, partly because of the difficulty I’ve had, up until this point, getting any traction with the idea that negative gearing itself should be curtailed or abolished. My own work had showed, and I think it’s now widely accepted, that the change in the capital gains tax regime back in 1999 did more than anything else to enhance the popularity of negative gearing as an investment strategy. Because what it did in the minds of taxpayers and investors was to convert what had traditionally been a strategy that resulted in a deferral of tax into one which, with the 50% discount, became a strategy that allowed people not only to defer tax, but actually permanently to reduce it, depending on the size of the capital gain they made. So winding back the capital gains tax discounts would certainly reduce the appeal of negative gearing even if you continued to allow it under existing arrangements.

I’d argue that an additional desirable policy change, though not one which the government or the opposition has contemplated, would be to say not only should the discount be reduced from the present 50%, but that for people who do undertake negatively geared investments the excess interest over rental income which they seek to offset against their other wage and salary or other income ought to be subject to the same discount as well, whatever that discount figure actually is. So, for example, if it was still 50% then you would only be able to offset 50% of the excess interest you might have incurred under a negatively geared arrangement in any given one year against your other income for tax purposes rather than, as at present, all of it.

Karl: There are a lot of myths going around in the press at the moment, we’ve already dispelled one about negative gearing reforms in the mid-‘80s having led to rental increases. But another common one is saying that the majority of people who claim negative gearing deductions are low to medium income earners. How do they enact this sleight of hand, Saul Eslake?

Saul: Well, what they do is appeal to the statistics published at the end of April each year by the Australian Taxation Office called Taxation Statistics. You can find them on their website, it’s a fairly clunky set of Excel spreadsheets but, with a bit of effort, you can work your way around them.

What they do show at first instance is that almost 80% of the number of taxpayers who claim rental interest deductions have a taxable income of less than $80,000. And this then, combined with some of the data that the Tax Office also provides on the occupational status of different categories of taxpayers, helps underwrite the claim that negative gearing is mainly done by cops, teachers and nurses, among others, as if that somehow made it alright. I’d note in passing that police, teachers and nurses are much more likely to join trade unions, for example, than other members of the workforce but you don’t usually hear Coalition spokespeople saying that that’s a good thing as well and more people ought to do it. But the key point here is that these figures are based on taxable income and, of course, the whole purpose of negative gearing is to reduce your taxable income relative to your actual income.

The same set of figures can be used to show that the average rental interest deduction claimed by those taxpayers with a taxable income of less than $6,000 per year of those who make those claims is $11,500. That is almost twice their taxable income. Now my guess is there are not many bankers out there who would willingly lend to people whose total income is less than $6,000 a year. Indeed, the Taxation Office figures show, according to what the Labor Party has said though I haven’t verified this myself, that there are some 64,000 people making negative gearing claims who have no taxable income at all. In other words, what’s clearly evident is that the figures which are quoted by proponents of negative gearing to buttress this claim that negative gearing is actually something that ordinary mainstream Australians do en masse is quite misleading.

A far better guide to how negative gearing is used and by whom comes from the Stats Bureau’s regular surveys of income and wealth distribution. The most recent one of those for the 2013/14 financial year shows that 72% of the value of investment properties, that is all property other than owner-occupied housing, is owned by households in the top 20% of the wealth distribution, that is the richest fifth of Australian households, and that those same households own 52% of the amount of investment property-related debt. Figures from the University of Melbourne’s Household Income & Labour Dynamics Australia (HILDA) survey that have been put together by the Reserve Bank show much the same thing and the Reserve Bank has commented on this in some of its statements on monetary policy and reports on financial system stability.

The overwhelming majority of investment property debt is actually owed by rich folks, not by average ordinary mainstream Australians.

Karl: So over to the Liberal Party, they’re floating ideas that perhaps they’ll limit the number of properties someone could negatively gear. This seems to be a lesser reform but one that’s likely to appeal to their supporters and my initial feeling is that all of a sudden plenty of five and six year olds, plenty of kids will all of a sudden own real estate.

Saul: Well it’s hard to know exactly what the effects will be until we know what the Coalition government is proposing, if indeed it does anything at all. The suggestion I’ve heard is that they might put a cap on either the number or the value of properties owned by it could be an individual taxpayer or a household which would be eligible for negative gearing. Alternatively there could be a cap on the total amount that can be claimed by way of interest in excess of income by any individual taxpayer or a household through negative gearing.

Either way, it would appear that that would actually have its greatest impact on the wealthiest of households rather than on the somewhat larger number though smaller value of claims made by the cops, teachers and nurses among others of whom the Property Council and others are all of a sudden all so fond. In that case, you might be able to say that what the Coalition is proposing is actually more equitable in the sense that it has a bigger impact on higher income and richer households than what the Labor Party is proposing. You might then ask why would they do that and the answer might be because the people who’d be most affected by it would be most likely to live in very safe Liberal seats where their votes don’t count, whereas the so-called cops, teachers and nurses are of course much more evenly spread over marginal electorates where their votes do count.

Forgive the cynical interpretation of the government’s possible motives there, but I’ve learnt over the years that such cynicism doesn’t really do you any harm in seeking to interpret why politicians do what they do.

Karl: Saul Eslake, let’s finish with the possible timing of such a policy reform as we see markets in Perth and Darwin, certainly Melbourne and Sydney, being less healthy in the property sector. As rental yields continue at record lows, do you think at this point in the economic cycle, will it futureproof negative gearing reform by implementing it now?

Saul: I wouldn’t say this was the ideal time to have them implementing it. It might have been much better, including for those who’ve been squeezed out of the housing market over the last four or five years, if this had been done some time ago, as a few of us were advocating. So I think assertions that the sort of changes that are being proposed will lead to a tidal wave of selling of investment properties are about as believable as most of the other claims that are made by negative gearing’s proponents.

I mean, in the first instance the Labor Party’s proposal is to grandfather those who already have negatively geared investments and you would think, as I said before, that the result of that grandfathering would be to make it even less likely that people who own existing assets would sell them than any alternative policy. And I find it hard to believe that if the Coalition also seeks to do something in relation to negative gearing that it too wouldn’t grandfather existing investments, as the Labor Party is doing. But suppose, notwithstanding that argument, that there was to be some selling of negatively geared properties in the aftermath of such a change you have to ask yourself who would those properties be sold to?

Well they wouldn’t be sold to other investors presumably since they would likely be deterred by the inability to enter into tax-preferred negatively geared arrangements as the result of any change. Rather those properties would be sold, in all likelihood, to people who had been wanting to buy a home to live in themselves, but had been frustrated in their aspirations to do so by the competition they faced from investors who had their mortgage costs subsidised through the tax system by other taxpayers. So those homebuyers who therefore became successful in meeting their aspirations to buy their own home would cease to rent, the demand for rental housing would drop by the same amount as the supply of it allegedly would, and there should therefore be no net change in the balance between the supply or the demand for rental housing such as would have a material impact on rents.

It’s another one of the assertions made by defenders of negative gearing that, as I say, doesn’t survive a moment’s confrontation with facts.

Karl: Well Saul Eslake, any last piece of advice you can share with our listeners on what they can be doing right now to help push this momentum for negative gearing and capital gains tax reform?

Saul: I think the best advice I can give is to challenge the arguments that are put by defenders of negative gearing whenever you hear them. I mean, I’m not personally critical of the property industry for defending their own interests. That’s what interest groups are meant to do, that’s why people pay to join them is so that someone is out there arguing their case. You can’t, as Neville Wran used to say, blame self-interest, you can be sure that it’s always trying. What we can object to is people who equate self-interest with the national interest and politicians who fail to see self-interest masquerading as the national interest for what it is.

So my appeal would be to those who understand the arguments and want to see changes made in this area to stand up and call out these kind of arguments, hopefully using thoughts of their own or things that they’ve heard in our discussion today bolster their case so that ultimately right will prevail.

Karl: Saul Eslake, thanks so much for joining us here on the Renegade Economist.

Saul: It’s a real pleasure Karl, thank you for having me.

Karl: So there we have Saul Eslake., check out his work. Also, plug his name into our website and you’ll find his 122nd Annual Henry George Commemorative Dinner speech where he nailed all of those facts with charts, spells it out. You can read it in a bit more detail there. And please, pick up some of those key points and hit your MP with it. It’s just ballistic that the top 10% of income earners own 72% of housing wealth. That is a massive one. The top 20% are taking 80% of the capital gains write offs. The list goes on and on, it’s got to stop, it’s got to end, you know it’s been one of our primary issues here on 3CR’s Renegade Economist.

Now come and have a chat with us on Monday night in Hawthorn at the Lido Cinema, we’re watching The Big Short. Yes, The Big Short, all about the sort of financial shenanigans that have gone on in Wall Street. A lot of hype about the film so our team will be there and we’d love to meet with you at seven o’clock, details will be on the Prosper website soon. And check out for all of today’s show notes and I’ll provide more details there. Alrighty, thanks very much for listening. My name’s Karl Fitzgerald and watch out for The Boldness coming up very soon here on 3CR.

Saul Eslake: 50 Years of Housing Failure


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Address to the 122nd Annual Henry George Commemorative Dinner
The Royal Society of Victoria, Melbourne
2nd, September 2013
by Saul Eslake
An edited audio recording of the presentation was broadcast on this week’s Renegade Economists radio show.

Note: The opinions expressed in this talk are solely those of the speaker in his private capacity, and should not be attributed in any way, expressly or indirectly, to his employer or to any other organization or agency with which he may be associated .


I appreciate very much the opportunity to talk to you at the 122nd Annual Henry George Commemorative Dinner.

Henry George was one of the more innovative economic thinkers of the 19th century, and it is in some ways a pity that his work is not better known among those who do know at least a little of the history of economic thought, as that of some of his contemporaries such as John Stuart Mill, William Stanley Jevons, or Alfred Marshall still is today.

I first ran across him when I was studying Australian History at Year 12, and focusing in particular on the Great Depression of the 1890s. I learned then that George’s advocacy of a single tax on the unimproved value of all privately-held land had found favour with sections of the then newly-emerging Australian labour movement.

Perhaps for that reason, those Australians who have actually heard of Henry George usually place him on the left of the political spectrum. Yet that is a gross over-simplification. He was also a strident advocate of restrictions on Asian immigration – as was the Australian Labor Party in its early days, and indeed right up until the 1960s – although these days, that is a position usually associated with the extreme right. Like most other economists, he was concerned about the existence and exploitation of monopoly power. And, also like most other economists, in his time and today, he was an advocate of free trade, pointing out that tariffs are not something that foreigners pay to get their goods into the country which imposes them, but rather something that a country’s government makes its own citizens pay in order to keep foreigners’ goods out: or, as he put it, “it is not from foreigners that protections preserves and defends us: it is from ourselves” (George 1905: 45-46).

Nor is the advocacy of a greater role for the taxation of land in taxation systems an exclusively left-of-centre position. Adam Smith, commonly if not entirely accurately regarded as the father of “laissez faire”, proposed what he called ‘ground rents’ as ‘a proper subject of taxation’ a century before Henry George (Smith 1776: Book V, Chapter 2). Milton Friedman – who in no sense could be characterized as being anywhere near left-of-centre (notwithstanding his principled advocacy of the decriminalization of drug use) – once said that, in his opinion “the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago” (Friedman 1978). The Economist – the antithesis of a ‘socialist rag’ – earlier this year stated that “taxing land and property is one of the most efficient and least distorting ways for governments to raise money”, citing an OECD study suggesting that “taxes on immovable property are the most growth-friendly of all taxes” (Economist 2013: 70).

The Henry Review of the Australian taxation system concluded that “land is an efficient tax base because it is immobile; unlike labour and capital, it cannot move to escape tax” and that “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases” (Henry 2009: 247). Henry George would have been pleased.

All of this notwithstanding, very few economists – and I am not one of them – would today accept that it would be either possible, or even if it were possible, desirable, for a land tax to be the sole source of government revenue, as Henry George advocated. He was writing at a time when government revenue requirements were substantially smaller than they are today; and when it was far less likely than it is today that people could be ‘asset rich but income poor’. But there is still a very sound case for the taxation of land to play a greater role in raising revenue for public purposes than it does today.

Housing policy: a half-century of policy failure

Housing is important. It meets a variety of deeply personal needs, including those for shelter and (ideally) security. It provides a sense of attachment (the place where we live) and, for many people, contributes to their sense of identity. These are pretty basic needs for almost all of us, as human beings. In addition, for many people, it is an important means of building wealth (and often the most important one); and for some, it provides the foundation for starting a business.

In Australia, most of us are well-housed – at least in a physical sense. Although it hasn’t always been the case, and it isn’t the case for all Australians today (not least for Indigenous people), most of us live in houses or apartments that are well-constructed, amply fitted with various devices that make the accomplishment of household tasks easier than it was in our great-grandparents’ day, and replete with other appurtenances and chattels that in some way or other provide us with enjoyment or add meaning to our lives.

That isn’t the case in many other parts of the world. In July, I spent a week in Madagascar, which according to the IMF is the sixth-poorest country in the world, measured in terms of purchasing-power-parity per capita GDP. It ranks 151st (out of 186 countries) on the United Nations latest Human Development Index. People in Madagascar are not, in general, well housed. From my own observation, outside of the capital, Antananarivo, most people in Madagascar live in wooden or mud-brick huts that, in many cases, are smaller than the lounge room of a typical new Australian house, with roofs made of thatch, and in many cases without glazed windows. It puts our housing issues into a different perspective.

Reflecting the importance of housing to people’s well-being, as well as to many broader objectives, Australian Governments of all political persuasions have long purported to attach a great deal of significance to goals such as promoting home ownership, improving housing affordability, and increasing housing supply.

And, once upon a time, Australian Governments did actually pursue policies that promoted those objectives (see Charts 1 and 2):

  • between 1947 and 1961, the housing stock increased by 50% -compared with a 41% increase in Australia’s population over this period. The Commonwealth and State Governments directly contributed 221,700, or 24% of the total increase in the housing stock over this period, through programs financed under the Commonwealth-State Housing Agreements, or under the War and Defence Service Homes Schemes.
  • during this period, the home ownership rate increased from 53.4% to 70.3% -the largest increase in home ownership in Australia’s history.
  • between 1961 and 1976, the housing stock increased by a further 46% -again outstripping the 33% increase in Australia’s population over this period. During this period, the Commonwealth and State Governments directly added a further 299,000 dwellings to the housing stock, equivalent to 23% of the increase in the total housing stock over this period.
    during this period, the home ownership rate fluctuated between 68% and 71%, but remained at a high level by international standards.

In other words, during this period, Federal and State Government housing policies were principally directed towards increasing the supply of housing, and at increasing or maintaining home ownership rates. And these policies actually achieved those objectives.

Chart 1: Growth in the population and housing stock, 1947-2011

Chart 2: Home Ownership rates accelerated post WW2

Chart 3: Home ownership rates at Censuses, 1947-2011

There were downsides to these policies, of course – in particular, many of the dwellings built by State housing authorities, and by the private sector, were poorly located from the standpoint of access to employment, lacked basic infrastructure and community services, and inadvertently served to concentrate socio-economic disadvantage. But they did ensure that a rapidly-growing population was at least adequately housed, and they gave many families an opportunity to gain a first foothold on the home ownership ladder that they would otherwise not have had.

Even between 1976 and 1991, the housing stock increased at a much faster rate – 41% than the population – 23% -although only 9% of dwelling completions during this period were by the public sector.

But the relationship between growth in the housing stock and population growth began to change after the early 1990s. Between 1991 and 2001, Australia’s population grew by 11.5% , while the housing stock grew by only 18.3% -less than 9 pc points more than the population. And between 2001 and 2011, while the population grew by 15.9%, the housing stock grew by only 15.2%. That is, over the past decade, the housing stock has grown at a slower rate than the population – for the first time since the end of World War II.

This gradual narrowing in the ‘gap’ between the growth rate of the housing stock and that of the population – to the point of eliminating it entirely over the past decade – has come in the face of demographic trends that would have warranted a widening of this gap:

  • average family sizes declined between the early 1960s and the early 1990s, implying that more dwellings are required to accommodate the same number of people;
  • family breakdowns have meant that more dwellings are required to accommodate the same number of people; and
  • population ageing has resulted in more people living alone, again increasing the number of dwellings required to accommodate the same number of people.

Yet, in the face of these ongoing trends, the average number of people per dwelling actually rose (from 2.61 to 2.64) between the 2006 and 2011 Censuses – for the first time in at least 100 years (since the first Commonwealth Census was conducted in 1911 – see Chart 3). From 1911 to 2006, the average number of people per dwelling had fallen from 4.52 to 2.61. It would seem that the widespread angst among ‘baby boomer’ parents about how difficult it is to get their 20-(and in some cases 30-) something children out of the family home has a sound basis in fact.

Chart 4: Average number of people per dwelling at Censuses, 1911-2011

This is what the National Housing Supply Council, of which I’m a member, means when it estimates that Australia has a ‘shortage’ of housing relative to the ‘underlying’ demand for it – a shortage which it last estimated to be of the order of 228,000 dwellings as at 30 June 2011 (NHSC 2012: 24-25).

That 228,000 figure is not an estimate of the number of homeless people in Australia (which the ABS put at just over 105,000, a number which included 41,390 people living in ‘severely overcrowded’ dwellings, at the 2011 Census – ABS 2012). Rather, it reflects the gap between the existing housing stock, and what the Council estimates the stock would need to be if household formation patterns had remained essentially unchanged over the past decade.

In passing, I should note that these estimates pre-date the results of the 2011 Census, which has resulted in some downward revisions to the estimated level of Australia’s population compared with those which had been based on extrapolations from the 2006 Census, and which will lead to some consequential revisions to these estimates of the housing ‘shortage’.

However, it would be a mistake to think – as some other commentators have – that the revisions prompted by the 2011 Census results have eliminated the ‘housing shortage’ which the National Housing Supply Council and others had previously identified (see NHSC 2013: 107-123).

Nor, in my view, is the idea that there is a ‘housing shortage’ in the sense intended by the NHSC contradicted by the work that Philip Soos has undertaken for Earthsharing Australia, using data from Melbourne water suppliers to show that up to 6% of residential properties across the Melbourne metropolitan area may have been vacant during the second half of 2011 (Soos 2012).

If those vacant properties aren’t available (for whatever reason) for sale or rent then their existence does not detract from the existence of a housing shortage – although it may well be, as Philip argues, that an increase in land tax could prompt at least some of the owners of those properties to make them available for sale or rent.

I think there are two principal reasons for the increasing failure of the stock of housing to grow at a rate commensurate with the growth rate (and changing needs) of the population:

First, the direct contribution of the public sector to growing the housing stock has declined substantially. From the mid-1950s to the mid-1970s, public sector agencies completed an average of 15,512 new dwellings per annum (and they indirectly financed the completion of another 3,600 dwellings annually through low-interest loan schemes). From the mid-1970s to the early 1990s, they completed an average of 12,379 new dwellings per annum. But since then, they have completed an average of less than 6,000 new dwellings per annum (indeed between 1999 and 2009 the public sector built fewer than 4,000 new dwellings per annum, on average).

Second, state and local government planning schemes and policies for charging for the provision of suburban infrastructure have made it increasingly difficult for the private sector to supply new housing, especially at the more affordable end of the spectrum.

This second reason has three distinct dimensions.

First, state and local authorities have imposed increasingly more onerous requirements on developers for the provision of infrastructure and services in new housing estates. While that undoubtedly represents ‘progress’ in many respects – and certainly adds to the amenity of ‘greenfields’ developments from the perspective of those who move into them – it comes at a cost.

Second, local authorities have changed the way in which this infrastructure and these services are provided, from a model based on paying for them largely through debt, which was then serviced and repaid out of subsequent increases in rate revenues, to one based on paying for them through ‘up front charges’ on developers.

While this is consistent with a ‘user pays’ philosophy, and appeases the growing voter aversion to public debt, it has meant (especially in New South Wales, where developer charges have risen to much higher levels than in other States) that developers find it increasingly difficult to produce house-and-land packages at prices which are affordable for first-time buyers and still make a profit, so they have reacted by building a smaller number of more expensive houses targeted at the trade-up market.

Third, metropolitan planning authorities and inner-city local governments have made it increasingly more time-consuming and onerous to undertake higher-density or ‘infill’ developments on ‘brownfields’ sites – in particular by imposing tighter planning controls, and by providing more opportunities for objections to and appeals against planning decisions.

As with the more onerous requirements for infrastructure provision in ‘greenfields’ sites, there are two sides to this story, and I have a lot of sympathy with the desire of residents in established areas to prevent developments which detract materially from their quality of life (and/or from the value of their properties). But whatever perspective one might take on that debate, there is no doubt that developments in planning law have contributed to the mismatch between housing demand and housing supply.

What is also noticeable about the last twenty years is that – despite mortgage interest rates having been substantially lower, on average, over this period (7.59% pa over the past 20 years, compared with 11.95% over the preceding 20), and despite unprecedented expenditure on grants to first home buyers – the overall home ownership rate has actually declined by 5 percentage points, to 67% at the 2011 Census, its lowest figure since the 1954 Census.

In fact the decline in home ownership has been even more pronounced when one ‘looks through’ the effects of the ageing of the population, which (among other things) means that an increasing proportion of the population is within age groups where home ownership rates are always (and for obvious reasons) higher than in younger age cohorts.

Research by Judy Yates of the University of NSW shows that home ownership rates among younger age groups declined dramatically between the 1991 and 2011 Censuses – from 56% to 47% among 25-34 year olds; from 75% to 64% among 35-44 year olds; from 81% to 73% among 45-54 year olds; and 84% to 79% among those over 55. In fact the only age cohort among whom home ownership rates didn’t decline over the past 20 years was 15-24 year olds: but that was only because their home ownership rate had already fallen 34% in 1961 to 24% by 1991 and didn’t decline any further.

The decline in home ownership rates among younger age groups is almost certainly due in part to changing preferences (including partnering and having children at older ages, and greater importance attached to proximity to employment or entertainment venues): but it also undoubtedly owes more to declining affordability.

This is also evident in the fact that home owners are taking longer to pay off their mortgages. According to the ABS’ just-released Survey of Housing Occupancy and Costs (ABS 2013b), only 45.8% of home-owning households owned their home outright in 2011-12, compared with 58.5% in 1994-95.

Chart 5: Home ownership rates by age cohort, 19961-2011

This may be partly due to the fact that households can, and do, use mortgages for other purposes apart from simply acquiring the property which is mortgaged: but I think it is far more due to the fact that people need to borrow much more money initially in order to acquire a property now than they did 20 years ago.

So, when set against the stated objectives of the housing policies pursued by successive governments of various political persuasions, the results have been dismal.

Although most Australians are, as I noted at the beginning, physically well housed, it can no longer be said that we are, in general, affordably housed; nor can it be said that the ‘housing system’ is meeting the needs and aspirations of as large a proportion of Australians as it did a quarter of a century ago. And in making that assertion I am thinking of the extent to which the housing system meets the needs and aspirations of those who don’t want, or can’t and won’t ever be able to, become home-owners, as well as of those who do seek that status.

That is why I gave this talk the title, ‘Fifty Years of Failure’. In order to develop that proposition more fully, I want to turn now to two of the principal policies which governments of both persuasions have pursued throughout this period.

Assistance to first home buyers

It’s hard to think of any government policy that has been pursued for so long, in the face of such incontrovertible evidence that it doesn’t work, than the policy of giving cash to first home buyers in the belief that doing so will promote home ownership.

The Commonwealth Government started giving cash grants to first home buyers in 1964 when, at the urging of the New South Wales Division of the Young Liberal Movement (whose President at the time was a young John Howard), the Menzies Government began paying Home Savings Grants of up to $500 to ‘married or engaged couples under the age of 36’ on the basis of $1 for every $3 saved in an ‘approved form’ (generally, with a financial institution whose major business was lending for housing) in the three years prior to buying their first home, provided that the home was valued at no more than $14,000.

This scheme was abolished by the Whitlam Government in 1973 (in favour of an income tax deduction for mortgage interest payments by persons with a taxable income of less than $14,000 per annum); re-introduced under the name of Home Deposit Assistance Grants (without the age or marriage requirements and the value limits, and with a larger maximum grant of $2,500) by the Fraser Government in 1976; replaced by the Hawke Government in 1983 with the First Home Owners Assistance Scheme, initially with a maximum grant of $7,000 (later reduced to $6,000) and subject to an income test; abolished by the Hawke Government in 1990; and then re-introduced as the First Home Owners Grant (FHOG) by the Howard Government in 2000, without any income test or upper limit on the purchase price of homes acquired, ostensibly as ‘compensation’ for the introduction of the GST (even though the GST only applied to the purchase of new homes, and not to existing dwellings which the majority of first-time buyers purchase). In this guise it was really just the first of what became an explosion in ‘status-based welfare’ payments to selected groups irrespective of needs during that decade. On two occasions since 2000, the FHOG has been temporarily increased in response to an actual or feared slump in housing activity (and in 2008, in response to a feared decline in house prices).

Over the past decade, most State and Territory Governments have ‘topped up’ the basic FHOG payments to first-time buyers with grants from their own resources, with some States providing even larger grants to buyers meeting certain additional criteria (for example, the Victorian Government provided an additional $5,000 for buyers of new homes in rural and regional areas).

I estimate that the Commonwealth, State and Territory Governments spent a total of $22.5bn (in 2010-11 dollar values) on cash grants to first home buyers between 1964 and 2011.

Chart 6: Explosion in status based welfare

State and Territory Government also provide indirect financial assistance to first-time buyers by partially or totally exempting them from the stamp duty they would otherwise pay on their purchases. In 2011-12 alone, these were worth around $3bn.

Chart 7: Spending on cash assistance to first home buyers, 1964-65 to 2011-12

Governments have thus been providing cash handouts to first-time home-buyers for almost half a century. Yet, as I mentioned earlier, the overall home ownership rate has never been higher than it was at the 1961 Census, immediately before governments started going down this path; and among the age groups which are supposedly most intended to benefit from these handouts, home ownership rates have declined almost vertiginously over the past two decades.

And it’s pretty obvious why. Cash grants and other forms of assistance to first-time home buyers have served simply to exacerbate the already substantial imbalance between the underlying demand for housing and the supply of it.

In those circumstances, cash handouts for first home buyers have simply added to upward pressure on housing prices, enriching vendors (and making those who already housing feel richer) whilst doing precisely nothing to assist young people (or anybody else) into home ownership. For that reason, I often think that these grants should be called ‘Existing Home Vendors’ Grants’ – because that’s where the money ends up – rather than First Home Owners’ Grants.

Encouragingly, perhaps – after what in my case has been more than 30 years of putting this kind of argument – State and Territory Governments appear at last to have gotten this message. Over the past 18 months or so, every State and Territory Government has either abolished or at least substantially reduced grants to first home buyers who buy existing dwellings, whilst increasing their grants to those who buy new ones, with a net effect of reducing the total spend on assistance to first home buyers.

I have no doubt that some of the increased grants to first time buyers of new homes will end up boosting developers’ or builders’ profits: but I accept that at least some of it will induce a supply side response to any resulting increase in demand for new homes, while considerably fewer taxpayers’ dollars will be wasted inflating the prices of existing homes.

‘Negative gearing’

Another long-standing policy which I have long argued has not only failed to deliver on its oft-stated rationale of boosting the supply of housing – in this case for rent – but has actually exacerbated the mis-match between the demand for and the supply of housing, as well as having distorted the allocation of capital, and undermined the equity and integrity of the income tax system, is so-called ‘negative gearing’.

It is perhaps a telling indication of just how generous Australia’s tax system is to investors in this regard, compared with those of other countries, that one usually needs to explain to foreigners what the term ‘negative gearing’ actually means (see for example RBA 2003: 4045).

‘Negative gearing’ originally allowed taxpayers in effect to defer tax on their wage and salary income (until they sold the property or shares which they had acquired with borrowed money, on which they were paying more in interest than they received by way of dividends or rent). However, after the Howard Government’s 1999 decision to tax capital gains at half the rate applicable to other income (instead of taxing inflation-adjusted capital gains at a taxpayer’s full marginal rate), ‘negative gearing’ became a vehicle for permanently reducing, as well as deferring, personal tax liabilities. And the availability of depreciation on buildings adds to the way in which ‘negative gearing’ converts ordinary income taxable at full rates into capital gains taxable at half rates.

Chart 8: ‘Negative gearing’, 1993-94 to 2010-11

It’s therefore hardly surprising that ‘negative gearing’ has become much more widespread over the past decade, and much more costly in terms of the revenue thereby foregone (see Chart 6 above).

In 1998-99, when capital gains were last taxed at the same rate as other types of income (less an allowance for inflation), Australia had 1.3 million tax-paying landlords who in total made a taxable profit of almost $700mn. By 2010-11, the latest year for which statistics are presently available, the number of tax-paying landlords had risen to over 1.8mn (or 14% of the total number of individual taxpayers), but they collectively lost more than $7.8bn, largely because the amount they paid out in interest rose more than fourfold (from just over $5bn to almost $23bn over this period), while the amount they collected in rent ‘only’ slightly less than trebled (from $11bn to $30bn), as did other (non-interest) expenses.

If all of the 1.2mn landlords who in total reported net losses in 2010-11 were in the 38% income tax bracket, their ability to offset those losses against their other taxable income would have cost over $5bn in revenue foregone; to the extent that some of them are in the top tax bracket then the revenue loss is obviously higher.

This is a pretty large subsidy from people who are working and saving to people who are borrowing and speculating (since those landlords who are making ‘running losses’ on their property investments expect to more than make up those losses through capital gains when they eventually sell them).

And it’s hard to think of any worthwhile public policy purpose which is served by it. It certainly does nothing to increase the supply of housing, since the vast majority of landlords buy established properties: 92% of all borrowing by residential property investors over the past decade has been for the purchase of established dwellings, as against about 72% of all borrowing by owner-occupiers.

Precisely for that reason, the availability of ‘negative gearing’ contributes to upward pressure on the prices of established dwellings, and thus diminishes housing affordability for would-be home buyers.

Supporters of ‘negative gearing’ argue that its abolition would lead to a ‘landlord’s strike’, driving up rents and exacerbating the existing shortage of affordable rental housing. They repeatedly point to what they allege happened when the Hawke Government abolished negative gearing (only for property investment) in 1986 – that it ‘led’ (so they say) to a surge in rents, which prompted the reintroduction of ‘negative gearing’ in 1988.

This assertion is actually not true. If the abolition of ‘negative gearing’ had led to a ‘landlord’s strike’, as proponents of ‘negative gearing’ repeatedly assert, then rents should have risen everywhere (since ‘negative gearing’ had been available everywhere). In fact, rents (as measured in the consumer price index) only rose rapidly (at double-digit rates) in Sydney and Perth – and that was because in those two cities, rental vacancy rates were unusually low (in Sydney’s case, barely above 1%) before negative gearing was abolished. In other State capitals (where vacancy rates were higher), growth in rentals was either unchanged or, in Melbourne, actually slowed (see Chart 9).

Chart 9: Rents and vacancy rates in the mid-1980s

However, notwithstanding this history, suppose that a large number of landlords were to respond to the abolition of ‘negative gearing’ by selling their properties. That would push down the prices of investment properties, making them more affordable to would-be home buyers, allowing more of them to become home-owners, and thereby reducing the demand for rental properties in almost exactly the same proportion as the reduction in the supply of them. It’s actually quite difficult to think of anything that would do more to improve affordability conditions for would-be homebuyers than the abolition of ‘negative gearing’.

There’s no evidence to support the assertion made by proponents of the continued existence of ‘negative gearing’ that it results in more rental housing being available than would be the case were it to be abolished (even though the Henry Review appears to have swallowed this assertion).

Most other ‘advanced’ economies don’t have ‘negative gearing’: yet most other countries have higher rental vacancy rates than Australia does.

Chart 10: Rental vacancy rates in Australia and the United States

In the United States, which hasn’t allow ‘negative gearing’ since the mid-1980s, the rental vacancy rate has in the last 50 years only once been below 5% (and that was in the March quarter of 1979); in the ten years prior to the onset of the most recent recession, it has averaged 9.1% (see Chart 8 above).

Yet here in Australia, which does allow ‘negative gearing’, the rental vacancy rate has never (at least in the last 30 years) been above 5%, and in the period since ‘negative gearing’ became more attractive (as a result of the halving of the capital gains tax rate) has fallen from over 3% to less than 2%.

During that same period, rents rose at rate 0.8 percentage points per annum faster than the CPI as a whole; whereas over the preceding decade, rents rose at exactly the same rate as the CPI.

Similarly, countries which have never had ‘negative gearing’ – such as Germany, France, the Netherlands, the Nordic countries and (low-tax) Switzerland – have much larger private rental markets than Australia.

Some supporters of negative gearing also argue that since businesses can deduct all of the operating expenses they incur (including interest) against their profits in order to determine their taxable income, and can also ‘carry forward’ net losses incurred in any given year against profits earned in subsequent years so as to reduce the tax otherwise payable, it is only ‘fair and reasonable’ that investors should be able to do the same.

There are two flaws in this argument, in my view. First, a large part of the appeal of ‘negative gearing’ comes from the way in which it allows income which would otherwise have been taxed at the investor’s marginal rate effectively to be converted into capital gains, which are taxed at half the investor’s marginal rate. Businesses – if they are incorporated, as most businesses these days are – can’t do that. Companies aren’t eligible for the 50% discount on tax payable on gains on assets held for more than one year.

Second, while individuals are allowed to deduct expenses incurred in connection with producing investment income from their taxable income, they aren’t allowed to deduct many types of expenses incurred in producing wage and salary income.
To take an obvious example, wage and salary earners aren’t allowed to deduct the cost of travelling to and from work; nor are they allowed to deduct child care expenses.

Or, to take another example which may be an even closer analogy with ‘negative gearing’ for investment purposes, individuals aren’t allowed to deduct interest on borrowings undertaken to finance their own education as a tax deduction, even though that additional education may contribute materially to enhancing their future earnings – and even though any such additional future earnings will be taxed at that individual’s full marginal rate, as opposed to half that rate in the case of capital gains on an investment asset.

Let me be clear that I’m not advocating that ‘negative gearing’ be abolished for property investments only, as happened between 1986 and 1988. That would be unfair to property investors.

Personally, I think ‘negative gearing’ should be abolished for all investors, so that interest expenses would only be deductible in any given year up to the amount of investment income earned in that year, with any excess ‘carried forward’ against the ultimate capital gains tax liability, rather than being used to reduce the tax payable on wage and salary or other income (as is the case in the United States and most other ‘advanced’ economies).

But I’d settle for the recommendation of the Henry Review (2009, Volume 1: 72-75), which was that only 40% of interest (and other expenses) associated with investments be allowed as a deduction, and that capital gains (and other forms of investment income, including interest on deposits) be taxed at 60% (rather than 50% as at present) of the rates applicable to the same amounts of wage and salary income.

This recommendation would not amount to the abolition of ‘negative gearing’; it would just make it less generous than it is at the moment. It would be likely, as the Henry Review suggested, ‘to change investor demand toward housing with higher rental yields and longer investment horizons [and] may result in a more stable housing market, as the current incentive for investors to chase large capital gains in housing would be reduced’.

I could even accept the Henry Review’s recommendation that “these reforms should only be adopted following reforms to the supply of housing and reforms to housing assistance’ which it makes elsewhere, even though I disagree with the Henry Review’s concern that these reforms ‘may in the short term reduce residential property investment’.

I could also accept, grudgingly, that any of these changes could be ‘grandfathered’, in order to minimize opposition from those who already have negatively geared investments, and who would understandably see the modification or removal of ‘negative gearing’ without such a provision as directly disadvantageous to them.

However, the alacrity with which both major political parties moved to distance themselves from even these modest proposals in the Henry Review when it finally saw the light of day a few days before the 2009 Budget doesn’t provide much grounds for hope in that regard.

What could be done instead?

I’ve argued that two of the principal long-standing government interventions in the housing market – cash assistance to first-time home buyers and ‘negative gearing’ – have not only failed to achieve their stated objectives, but have actually exacerbated the difficulties facing those whom these interventions are supposed to assist:

  • they have served to inflate the demand for housing – and in particular, the demand for already-existing housing – whilst doing next to nothing to increase the supply of housing.
  • they have therefore made housing affordability worse, not better.
  • and to the extent that the ownership of residential real estate is concentrated among higher income groups – 36% of all property owned by individuals, and 47% of all property other than owner-occupied dwellings, is owned by households in the top 20% of the income distribution (ABS 2013c) – they exacerbate inequities in the distribution of income and wealth.

In passing, it is perhaps worth wondering why successive governments of various political persuasions have been so unwilling to alter policies which have not merely failed so abjectly to meet their stated objectives, but have demonstrably had such an adverse impact on those whom successive governments repeatedly assert they are keen to assist.

At the risk of appearing cynical – not that, in my experience, being cynical about the motivations of political parties and governments carries a serious risk of leading one into making erroneous predictions about what they might be– I think the answer is obvious. While political parties and governments profess to care about first home buyers, the reality is that in a typical year fewer than 100,000 people succeed in attaining home ownership for the first time; whereas there are some 5.8 million households (and over 8 million people) who already own at least one property. Hence there are 100,000 votes for policies which might result in lower house prices, and over 8 million votes against policies which might result in lower house prices (or in favour of policies which result in higher house prices). As the Americans say: ‘do the math’.

John Howard – who could ‘do the math’ better than most – often used to say that no-one ever came up to him complaining about the increase in the value of their home, or asking him to do things that would reduce the value of their homes so that younger people could buy them more readily.

Nonetheless, if by some chance a political party really did want to advocate and implement policies that really would stand some chance of improving the capacity of the Australian housing system to respond to the needs and aspirations of Australian citizens, what might they say?

The fundamental change that such a set of policies might embody would be a switch from policies which inflate the demand for housing to policies which boost the supply of housing. Such a suite of policies might include some or all of the following:

    • first, the abolition of all existing policies which serve only to increase the prices of existing dwellings, such as cash grants to and stamp duty exemptions for first time buyers, and ‘negative gearing’ for investors (in all assets, not just property, and if politically necessary, only for assets acquired after the date on which such a policy was announced);
    • second, the redirection of the funds thereby saved (and/or the additional revenue raised) towards programs that increase the supply of housing – for example, by directly funding the construction of new dwellings (as the Rudd Government did as part of its response to the global financial crisis), or by providing some combination of grants, loans or tax incentives to induce private sector developers to increase the proportion of ‘affordable’ dwellings within their developments, whether for sale or rental;
    • third, expanding or replicating programs like Western Australia’s ‘Keystart’ scheme which assist eligible people to become home owners on a ‘shared equity’ basis, with eligibility being subject to a means test, and which creates a ‘revolving fund’ as the ‘shared equity’ is returned to the State Government upon sale;
    • fourth, changes to the way in which State and Territory Governments tax holdings of and transactions in land, with a view to encouraging more efficient use of it. That would include replacing stamp duty on land transfers (which are ‘bad’ taxes on many grounds, including that they discourage people from changing their dwellings as their needs change) with more broadly-based land taxes (ie, no exemptions for owner-occupiers, but with appropriate transitional provisions) and possibly higher rates for undeveloped vacant land in established urban areas;
    • fifth, taking a more ‘holistic’ view of urban infrastructure investment, by recognizing that it has an important housing dimension – that is, that public (or private) investment in transport infrastructure (both public transport and roads) can make a tangible contribution towards improving housing supply and affordability by making ‘greenfields’ developments more accessible to both buyers and renters – and considering funding such infrastructure by levies on the increments to the value of the land which result from such investments (as for example with the levy that funded the Melbourne Underground Rail Loop Authority in the 1970s and early 1980s);
    • sixth, revisiting current models for financing the provision of infrastructure and services in ‘greenfields’ housing estates with a view to reducing the extent to which these are funded by ‘upfront’ charges (something which could be assisted by changes to the land tax regime which I mentioned a moment ago); and
    • seventh, reducing the cost, complexity and regulatory uncertainty associated with ‘brownfields’ and ‘infill’ developments in established areas – which doesn’t have to mean traducing the property rights of other property owners, but which should mean clearer and more uniform planning rules, with fewer opportunities for frivolous or vexatious objections and appeals.
    • Note that I am not advocating something that is often widely assumed to find favour with economists – namely, the removal of the exemption of owner-occupied housing from capital gains tax. I don’t favour that, because consistency with other parts of the tax system would require that mortgage interest payments be deductible. That would in turn almost certainly encourage people to take on more debt, and would thus inflate the demand for housing, putting further upward pressure on prices. And it could well end up being revenue negative.


Sadly, however, the political calculus to which I referred earlier means that there is probably less chance of any of these proposals being taken up – let alone all of them – than there is of Andrew Demetriou calling a press conference to announce that Tasmania really should have its own team in the Australian Football League. Politics – more than any other single factor – means that Australians are likely to have to live with a dysfunctional housing system for a long time yet to come.


Advisory Council for Intergovernment Relations (1982), Australian Housing Policy and Intergovernment Relations, Discussion Paper No. 14, Hobart.

Australian Bureau of Statistics (2012), Census of Population and Housing: Estimating Homelessness, Catalogue no. 2049.0, Canberra, November.
⎯⎯ (2013a), Building Activity, Catalogue no. 8752.0, March 2013, Canberra, July.
⎯⎯ (2013b), Housing Occupancy and Costs, Catalogue no. 4130.0, 2011-12, Canberra, August.
⎯⎯ (2013c), Household Wealth and Wealth Distribution, Australia, Catalogue no. 6554.0, 2011-12, Canberra, August.

Economist, The (2013), ‘Levying the Land’, London, 29 June.

Friedman, Milton (1978), Interview with the Times Herald, Norristown, Pennsylvania, 1 December; available at

George, Henry (1905), Protection or Free Trade, Doubleday Page & Co, New York.

Henry, Ken (chair) (2009), Australia’s Future Tax System – Report to the Treasurer, Part Two
– Detailed Analysis, Volume 1, Commonwealth of Australia, Canberra, December.

National Housing Supply Council (2012), Housing Supply and Affordability – Key Indicators
2012, Canberra.
⎯⎯ (2013), Housing Supply and Affordability Issues 2012-13, Canberra. Reserve Bank of Australia (2003),

Productivity Commission Inquiry into First Home Ownership, Submission by the Reserve Bank of Australia, Sydney, November.

Smith, Adam (1776), An Inquiry into the Nature and Causes of the Wealth Of Nations – Penguin Edition ed. by Andrew Skinner (1982), London.

Soos, Philip (2012), Speculative Vacancies in Melbourne: 2012 Report, Earthsharing Australia, Melbourne, June.

Yates, Judy, Hal Kendig and Ben Phillips (2008), Sustaining Fair Shares: the Australian Housing System and Intergenerational Sustainability, AHURI Final Report No. 2011, February (and updated by communication from Yates).


This document does not purport to constitute investment or business strategy advice. It should not be used or interpreted as an invitation or offer to engage in any kind of financial or other transaction, nor relied upon in order to undertake, or in the course of undertaking, any such transaction. No representations of any kind are made, nor are to be inferred, about any securities or financial instruments whatsoever based on anything in or inferred from this document. The information herein has been obtained from, and any opinions herein are based upon, sources believed reliable. The views expressed in this document are those of the author. Neither the author, nor any entity by which he is employed, nor any body of which he is a member or with which he is in any other way associated or affiliated, nor any of their affiliates or subsidiary or related entities however makes any representation as to their accuracy or completeness and the information should not be relied upon as such. All views, opinions and estimates herein reflect the author’s judgement on the date of this document and are subject to change without notice. The author, each and every entity by which he is employed, and each and every body or entity of which he is a member or with which he is otherwise associated, their affiliated and subsidiary entities expressly disclaims any responsibility, and none of them shall be liable for any loss, damage, claim, liability, proceedings, cost or expense (Liability) arising directly or indirectly (and whether in tort (including negligence), contract, equity or otherwise) out of or in connection with the views, opinions and contents of and/or any omissions from this document except to the extent that a Liability is made non-excludable by legislation.

Saul Eslake @ 122nd Annual Henry George Commemorative Dinner


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Link to presentation

Saul Eslake is one of Australia’s most highly respected economists and a renowned critic of Negative Gearing:

“In my view it is impossible to conclude that negative gearing serves any purpose than to allow wealthily affluent tax payers to defer and reduce tax.”

Mr. Eslake was chief economist at ANZ (1995 – 2009), Program Director at the Grattan Institute and is on a number of boards including the Australian Statistics Advisory Council, the National Business Arts Foundation and the National Housing Supply Council. He will be speaking from a personal perspective.

We meet in the stunning historical setting of the Burke and Wills room before heading upstairs to the lecture theatre at 6.45 pm. A buffet dinner follows.

The Annual Henry George Commemorative Dinner is held in honour of the treasured American economist, author of the landmark book Progress and Poverty. George was renowned for his literary style and sense of first principles as espoused in his famous statement:

The equal right of all men to the use of land is as clear as their equal right to breathe the air – it is a right proclaimed by the fact of their existence.

The Royal Society of Victoria has been promoting Science since 1854. Its members have been instrumental in creating many of Melbourne’s treasured cultural and scientific institutions.

$30 per person whilst tickets last.
Drinks available at cost price. The banquet is vegetarian.

Limited onsite car parking is available via Victoria St.
Directions Enter from Latrobe St

To putting the science back into economics.

Eslake in Senate submission on Housing Policy Failure


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who are rising_property_proces good

Saul Eslake has hit the press (p3 of the AFR – paywalled) with his submission to the Senate Committee on Housing Affordability. The submission is largely based on his 122nd Annual Henry George Commemorative dinner presentation.

Saul again reiterates his key point from the speech:

While political parties and governments professed to care about first home buyers, the reality was that they preferred to garner the votes of the 5.8 million households who sought policies that would increase house values.

With a survey last week indicating a significant change in sentiment, for the first time finding more people see rising housing prices as a negative, the change Saul is looking for is nearing.

The number of boomers taking out mortgages later in life is rising, whilst a fall in ownership levels amongst the young was a key point in the recent census.

Rising property prices place us all in greater debt. However, for too long the government has placed the policy reforms needed in the too hard box. We ask – if paying our weekly rent is our first financial priority, why isnt’t it the government’s first economic priority to keep rents low?

Eslake again mentions the need for a broad based Land Tax. Whilst not his only policy prescription, it is good to note how far this term has travelled in economic analysis. Many people have now heard the point enough times to be investigating what this magical tax can do.

Jesse Meyerson, the Rolling Stone journalist who set the debate on future economic priorities as the new year dawned wrote last year in Salon:

At present, neither party advocates the tax code so elegant it can reduce inequality, mitigate poverty, stimulate productivity, prevent asset price bubbles, stem community-shredding gentrification and drain the distended Wall Street cabal of its ill-gotten gains – in just one tax.

In short, Land Tax ensures that our most precious resource, land in prime locations, is used for productive (rather than speculative) purposes. It is simply a holding charge on land. If a Land Tax is implemented at a significant rate, the highest and best use of land occurs.

However, the reality is quite different. With the low level of taxation upon the windfall gains in land, it is no wonder that investors constituted 38.5% of housing loans in Nov 2013. This is significantly higher than the 12% average in the mid 80’s. The encouragement this provides to investors leads to thousands of empty homes held for speculative gain, as our Speculative Vacancies report has continually identified.

A significant cut in income taxes could be offered if those concerned by rising debt levels and the expanding wealth gap were willing to talk more vocally about the need for Land Taxes. That day is nearing!

The Senate deadline for applications is March 25th. Here are the terms of reference.

Homeless Protest Tax Incentives for Hoarding


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Today we featured in the Guardian article by Van Badham: Meet the homeless protesters who are taking on tax breaks for the rich. It has people talking – 236 shares and 208 comments in just a few hours. Badham writes:

Word of this betrayal travelled through Melbourne’s homeless community, which now numbers an estimated 25,000 people. In a state that now has 35,000 people on a public housing waiting list that is often over a decade long, a recent report by economic think-tank Prosper revealed that water-usage statistics indicated that as many as 80,000 residential properties in greater Melbourne sit empty.


Complaints about housing affordability from those who are working, earning and sheltered are a national affliction that derives from the same disease as that dispossessing the Melbourne underclass. Those begrudging the actions of the homeless in taking up residence in properties that they can’t afford, should consider the insight from Prosper’s research.

Prosper economist Karl Fitzgerald explained to me that there are now more than 10 tax advantages for property investors, “with capital gains triple the possible rental incomes in many locations”. Reducing housing supply in a demand-driven market inflates the value of properties that can then be borrowed against and used to fund the acquisition of even more properties with their tax offset on the investment, perpetuating the cycle of inflated value and ongoing, massive tax concessions.

“Higher prices ensures money flows out of communities and concentrates in the deep-pockets of those enjoying the first-come, first-served economic system,” Fitzgerald explains. Inflated costs affect government acquisition, too; it’s for this reason, he says, that NSW’s much-vaunted new public housing policy will cost $1.1bn to deliver only 3,000 houses over 25 years, while first home buyers are taking out 40 year mortgages that can demand $200,000 per decade in extra interest.

Fitzgerald is no outlier in his opinion of the iniquity; economist Saul Eslake recently denounced negative gearing as a form of tax avoidance. In a world deservedly resentful of the revenue gouging exposed by the Panama Papers leak, it’s worth remembering that property-rich individuals in Australia can claim the tax concessions of negative gearing against their wages and salaries.

Read the full article and share it with your network.

Earlier in the week I screened our documentary Real Estate 4 Ransom to a packed room at the Bendigo Street vacancy. Last week I interviewed one of the organisers Kelly Whitworth for the Renegade Economists in the show entitled Everybody needs a home, nobody needs a property portfolio.


The protest is an embodiment of community, with a home lying dormant for months transformed within hours to useful housing for many homeless. Gardens were planted, food donated and shared, stories exchanged. Soon it became a living embodiment of just how empowering access to land becomes, and how quickly communities can form to look after each other. But instead, our economic system offers 23 advantages to property investors. Shouldn’t it be the other way round?

Tax breaks for property investors accentuate the rate of homelessness. NO matter how much they invest, they can’t create more land. That’s why we need ‘the switch’ away from stamp duties and towards Land Taxes. Then hoarding housing becomes uneconomic. As KPMG modelling this week revealed, if we did this, all citizens would be $1,600 better off per year, alongside creating 32,000 jobs. That’s as many people as Westpac employs, enabling growth.  Join Prosper to support our work.

The Annual Henry George Commemorative Dinner




Prosper Australia and the Victorian Georgist movement have proudly held an annual dinner to celebrate the teachings of Henry George for 127 years. Each year land reformers meet on (or close to) George’s September 2nd birthday to enjoy a powerful presentation, dinner and discussion.

Our ability to appeal to both left and right has seen a wide variety of speakers. These include Walter Burley Griffin, Saul Eslake, Dr Jim Cairns, Reverend Tim Costello and EJ Craigie. In 1910 gramophone recordings of Lloyd George and Winston Churchill’s ‘The People’s Budget’ were played. In 1911 a Single Tax Comedy Drama ‘The Story of my Dictatorship’ was performed at the Austral Salon.

Please sign up to our enews to keep up to date with our annual dinner, regular events and economic commentary. View the details to recent dinners.

We are reminded of the power of Henry George’s analytical prowess in the highly regarded book Nature’s Gifts by John Pullen. This gives an account of George’s 1890 tour of Australia with quotes such as:

“The each man is entitled to all that his exertions produce; that no man is entitled to call the earth his own as against another man…What earthly benefit is the landowner, who is simply a landowner and no more, to the country? …He is more destructive that the rabbit or the kangaroo; he merely eats and gives nothing in return.” (Morning Bulletin Rockhampton, May 16, 1890)

Read the Honour Board of past speakers (PDF).

Georgism is a holistic socio-economic system enabling all living beings a rightful place on this planet, regardless of when you were born. There is no better mechanism to synergise human rights with economic opportunities and political freedom.

Reform Negative Gearing Now!


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eveningskies 570

Are you locked out of the housing market?

Do you want to see an end to market distorting subsidies to property investors?

Sign the petition!

This petition calls for the Federal Government to reform negative gearing NOW! Negative Gearing must be limited to new housing only and in time should be removed entirely. It is time future generations had the same opportunities as others. This reform process must be the START of winding back the incredible advantages property investors have over someone trying to buy a home.

Property investors are playing with the lives of millions of people who simply want a home.

Look at these facts:

Income earners in the top 20% now own 73% of the value of all investment property (ABS 6523)

– 80% of Negative Gearing benefits those in the top 20% of occupations. (Grattan Institute)

– Australia’s land values increased $525 billion last financial year (ABS 5204.61) but governments struggle to find some $40+ billion per annum to fund schools and hospitals.

– Negative Gearing reform will not increase rents. (Saul Eslake) Linking it to new housing supply will increase supply, pushing rents down.

– 93% of Negative Gearing goes to benefit people over 30 i.e. older, wealthier property investors. (NATSEM)

– 94% of negative gearing investors buy existing housing instead of new construction, adding very little to supply. (RBA)

– Negative Gearing is a tax expenditure which costs the public some $12 billion per annum. No wonder the pressure is on to increase taxes!

This reform will save buyers decades in interest repayments. It is worth understanding and acting upon!

ACT now by signing, sharing and talking about this inequity.

Karl Fitzgerald
Prosper Australia

Treasury Secretary falls for Gearing Myth


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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.

Almost 20pc of Melbourne’s investor-owned homes empty


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Not many lights on, not many taps running: water use data indicates that nearly one-fifth of all investor-owned homes may be vacant. Robert Prezioso

Not many lights on, not many taps running: water use data indicates that nearly one-fifth of all investor-owned homes may be vacant. Robert Prezioso

Published by the Australian Financial Review

by Michael Bleby

The number of empty houses and apartments in Melbourne is much higher than traditional estimates, with as many as one-fifth of all investor-owned properties lying empty, according to a study of water usage by think tank Prosper Australia.

Victoria leads the country in terms of new housing approvals and planning authorities gave the tick to 70,472 new dwellings in the 12 months to October – more than half of them apartments – but the Prosper figures indicate that while local and offshore investors are hungry for properties, they are not necessarily making those homes usable housing stock.

“There is an oversupply of housing that’s not being used,” said Catherine Cashmore, Prosper President and author of the report. “When the Victorian government talks about the need to build more housing to bring down prices, that strategy isn’t working. We don’t have anything to ensure those homes are being utilised. It doesn’t matter whether they’re foreign owned or investor owned the economic cost to us is enormous.”

A total 82,724 properties used less than 50 litres per day – the equivalent of a dripping tap and far less than a single person’s daily usage – suggesting they were effectively unoccupied, the data from retailers City West Water, South East Water and Yarra Valley Water shows.

Night light: apartments being deliberately kept vacant don't add to the country's stock of available housing, Prosper Australia says. Robert Prezioso

Night light: apartments being deliberately kept vacant don’t add to the country’s stock of available housing, Prosper Australia says. Robert Prezioso

That’s equivalent to 4.8 per cent of greater Melbourne’s total housing stock and 18.9 per cent of all investor-owned housing stock.

As many as 24,872 properties consumed no water at all, making them clearly unoccupied.

The number of vacant properties leapt 28 per cent last year, according to Prosper’s Speculative Vacancies report, now in its eighth year. The think tank advocates for broad-based land taxes to raise the cost of holding land unproductively, as well as for an end to stamp duty, which it says impedes the market for land transactions.

“Capital gains are a much more powerful market motive than earning mere rents,” says Karl Fitzgerald, Prosper project director. “That’s why the tax game needs to change.”

The idea has support.

“Should there perhaps be some kind of differential land tax that changes people’s incentives?” said independent economist Saul Eslake. “I have some sympathy with that view.”

It’s not clear how much of the vacant housing stock is foreign-owned and how much is locally owned. However, the Melbourne CBD – which has drawn much investment from overseas buyers – had the largest number of vacancies, with just over 1100  – 6.7 per cent of its 16,632 homes – using no water at all. Almost 15 per cent – 2478 properties – consumed less than 50 litres per day.

The student-heavy areas of Carlton and Carlton South had the highest ratio of empty homes with 7.6 per cent, or 597, of their total 7837 homes using zero water.

Melbourne’s hidden vacancies will become visible if the property market slows.

“When we get a downturn in housing markets it does lead people to sell their properties or rent them out to the market, that’s when these vacancies will become visible,” Ms Cashmore said.

Speculative Demand from Real Estate family


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Joe No Bubble Hockey

The Treasurer who told us to simply change jobs to afford skyrocketing Sydney has revealed his real motivations for ignoring the land bubble.

He dropped the bombshell on 3AW with Neil Mitchell:

“Yeah, well I come from a family of real estate agents…” 

The locked out generations can now understand why Hockey has fallen so easily into line with the housing lobby. The real estate industry do all they can to keep the bubble going, and now they have their man in the driver’s seat.

That Hockey is from a real estate family also informs as to why he has been steadfast in shying away from negative gearing reform. The Treasurer even goes as far as to push the misinformation that removing negative gearing will lead to higher rents. Saul Eslake gave the masterclass as to why this was incorrect at the 122nd Annual Henry George Commemorative dinner presentation.

Supporters of ‘negative gearing’ argue that its abolition would lead to a ‘landlord’s strike’, driving up rents and exacerbating the existing shortage of affordable rental housing. They repeatedly point to what they allege happened when the Hawke Government abolished negative gearing (only for property investment) in 1986 – that it ‘led’ (so they say) to a surge in rents, which prompted the reintroduction of ‘negative gearing’ in 1988.

This assertion is actually not true. If the abolition of ‘negative gearing’ had led to a ‘landlord’s strike’, as proponents of ‘negative gearing’ repeatedly assert, then rents should have risen everywhere (since ‘negative gearing’ had been available everywhere). In fact, rents (as measured in the consumer price index) only rose rapidly (at double-digit rates) in Sydney and Perth – and that was because in those two cities, rental vacancy rates were unusually low (in Sydney’s case, barely above 1%) before negative gearing was abolished. In other State capitals (where vacancy rates were higher), growth in rentals was either unchanged or, in Melbourne, actually slowed (see Chart 7).

For over 20 years the HIA have advocated for First Home Buyer access to superannuation. Hockey pushed the destructive concept after another Canberra insider with extensive property holdings, Nick Xenophon, had floated the access to enable deposits. Like the First Home Buyers Grant, if all FHB’s have access to more money, it becomes a seller’s subsidy. 

Lost amongst the debate of the growth in housing prices is the need for a clearer distinction in qualitative demand. The fourth wealthiest Australian, apartment king Harry Triguboff entered the debate with this exercise in economic theory:


The chief economist at NAB, Alan Oster also recently said ‘There is no bubble because there is genuine demand.’

A clear distinction must be made between speculative demand and housing demand. With investors continuing to grow and home buyers falling further and further behind, genuine demand should see owner occupiers dominating. Peter Martin informs us:

As recently as the early 1990s owner-occupiers accounted for 84 per cent of new home lending, leaving investors with less than 15 per cent.

When the Howard government halved the headline rate of capital gains tax in the late 1990s, investors accounted for 33 per cent of the money borrowed.

But for Hockey, supply and demand are simple concepts.

“I know, it’s a difficult concept for some to get their heads around, supply and demand, but it’s not that complicated. If you increase supply to meet the demand, then obviously you won’t get the growth in property prices that you may have thought if you have less supply.”

Supply matters little when investors easily crowd out First Home Buyers, with an armoury of 23 advantages set to keep them ahead of the game.

Instead of addressing this overwhelming investment pressure, Hockey has zeroed in on the populist sideshow of foreign investment. Last night our Speculative Vacancies report was referenced on the 730 Report (at the 7.30 minute mark).


Foreign investors are the tip of the iceberg when it comes to speculative demand. Hockey must read the Speculative Vacancies conclusion and push the nation towards genuine economic reform. Elsewise he may well be looking for a new job soon!