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Was the housing crisis caused by the Howard government’s policies?

After 25 years of Howard’s CGT relief, the unstoppable boom in house sales continues apace, writes Keith Mitchelson.

After 25 years of Howard’s CGT relief, the unstoppable boom in house sales continues apace, writes Keith Mitchelson. Photo: Getty

The housing crisis plaguing Australia is the direct result of Coalition taxation policies that favour individuals with capital and assets, and disadvantages individuals on wage incomes.

In 1999, John Howard reduced Capital Gains Tax (CGT) liabilities by 50 per cent for individuals, after Labor had introduced the CGT in 1985.

The reduction resulted in a boom in investment in existing housing (an instant earning asset), and it prompted richer individuals to transfer income into capital gains to reduce personal tax liabilities.

Howard’s reduction of CGT, rather than bringing an “expected increase the number of capital gains transactions”, instead saw a 10 per cent fall in reported CGT transactions in the three years from 1999 to 2002, which led to a fall in government tax revenues.

Hello GST

Having engineered a windfall gain for Liberal voters, the next year (2000) the Coalition introduced the Good and Services Tax to bolster lagging tax receipts.

The GST replaced regional and state taxes with a single unified tax, restoring federal and state incomes, but it inadvertently taxes a higher proportion of income from the poor than from the rich.

Of course, with virtually a decade of flatline wages and rising price inflation, the GST now tracks inflation rather than disposable income of households, with disproportionately greater pain to low-income households.

After 25 years of Howard’s CGT relief, the unstoppable boom in house sales continues apace, yet it occurs without a concomitant boom in house construction sufficient for this gangbuster demand for housing.

The rate of annual construction has fallen from a high of almost 10 houses per 1000 population in 1970 to just over 6 per 1000 today.

Many economists decried Howard’s CGT discount as “terrible”, noting similar policies introduced by several earlier Republican US presidents had disastrous effects on US interest rates and housing markets, and subsequently caused crises in the global economy.

How does the ‘manufactured housing market‘ work?

When Howard discounted the CGT, house prices in the luxury end of the market immediately began to rise.

Expensive house sales were widely reported, and estate agents soon suggested every client set ever-higher prices for their properties.

Banks are also prime players in higher house prices. They favour mortgage loans to low risk and wealthier borrowers, and covet ever-larger mortgages regardless of interest repayment rates.

Soon every home owner in the early 2000s was agog with rising house prices, and, of course, felt much richer thanks to the Coalition.

Gentrification boom

The gentrification of working-class neighbourhoods continues apace as fortunate home buyers move into older inner-city suburbs, and prices become unaffordable for children of working families who had lived there for generations.

Despite less than 7 per cent of houses being sold in any one year, all houses are potentially beneficiaries of the increasing prices when eventually marketed.

Layered on top is the attraction of Australian housing for overseas investors, and for illicit money laundering by locals and others.

Because Australian house prices grow at inexplicable rates, divorced from the wellbeing of the economy, investors and speculators across the world see property here as a safe haven for growing the value of assets, particularly more expensive assets.

Crowding out

Many economists have observed that those wishing to purchase a home are now often outcompeted (crowding out) by bidders backed with significant capital.

“Crowding out” has also contributed to the sustained increase in house prices, and is now expected by the real estate industry.

Another of Howard’s last measures (in 2007) allowing holders of Self-Managed Superannuation Funds to invest their portfolios in housing, means that some bidders come to auctions backed by $1.5 million or more in funds.

In 2023, some $60 billion for house purchases came from this source alone.

The housing crisis is thus one where investors realised that housing/property gave significantly higher returns than any other form of investment.

Naturally they moved their portfolios, and are now reinforcing an unstoppable increase in their wealth.

Yet, as Harry Chemay noted, “speculating in existing residential property … doesn’t meaningly add to the nation’s ability to create, build and trade … or grow the national economy sustainably”. It just increases inflation.

Role of the RBA

The RBA is tasked with controlling inflation in the economy, but has high interest rates only to curb popular spending, hopefully inducing cabals to moderate their prices.

Unfortunately high interest rates are also inflationary, making it a very painful medicine.

Yet, the continuing rampant purchasing by wealthy housing speculators shows their immunity to higher interest rates; rather they rely on it to crowd out competing bidders.

The crowding out of ordinary buyers has meant many are trapped as renters for extended periods, or that middle-class children must borrow, or be gifted from “the bank of mum and dad”.

In effect, savings from the lower side of the economic distribution are now flowing ever faster into the pockets of the rich, and especially to the banks.

Meanwhile, the government is trying to address the shortage in low-cost housing from the supply side, but their measures are insignificant and much too slow to be effective.

Labor could reverse trend

The Coalition claims that our present economic pain is entirely the fault of Labor does have some credibility.

Inflation is the key driver of the economic crisis, and it is fuelled by the government’s failure to rein in the domestic drivers of inflation – the price-gouging supermarkets, gouging landlords, energy suppliers, airlines and the raging housing market, to mention the obvious.

The crossbench and Greens have made numerous proposals to curb these sectors since 2022, but the government has only held inquiries to blame and shame perpetrators, hoping they would mend their ways. They have not!

Bill Shorten bravely offered policies at the 2019 election to redress the Howard GST discount and negative gearing.

Perhaps, as polls now indicate the public would like Howard’s legislation to be removed, then we could begin to repair Australia’s economic woes.

It will not be all plain sailing though, as lower interest rates from the RBA will likely stimulate another increase in house prices, and further rentier investment.

The Howard government brought in these measures, which are now seen to clearly benefit an undeserving section of the population at the cost of the majority.

The Albanese government could, with courage, reverse them, and curb ongoing inflation.

Keith Mitchelson has a 40-year experience in academic and commercial biotechnology sectors in the UK, China, and Australia

This article first appeared on Pearls And Irritations 

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