I’m betting the PBO has made the usual errors in their housing affordability modelling

The Australian Institute for Progress has called on independent senators Lambie and Pocock to release the Parliamentary Budget Office (PBO) modelling showing that eliminating negative gearing and raising the capital gains rate would lead to more housing affordability.

“Over the years we have seen a slew of models that purport to show that taxing housing differently will somehow increase housing supply and magically increase government receipts,” said AIP Executive Director Graham Young.

“They can only do this by leaving out significant countervailing factors and considerations.”

Mr Young said the first considerations should be tax efficiency and equity.

“It is a principle of our income tax system that a taxpayer can deduct their expenses from their income.

“Large investors with a range of investments, or businesses with income from other sources, can net off negative cashflow from one investment against positive cashflow from other investments or income sources.

“The negative gearing laws ensure this is available to small investors who buy a property in their own name and allow them to net off the negative cashflow on their real estate investment against other income that they earn, for example from employment.

“It would be inequitable to remove this ability.”

Mr Young said that there are good reasons for taxing capital at a lower rate than income, partly to do with capital formation, and also to avoid double taxation.

“In valuation theory the value of a property is the estimate of the sum of its future tax flows discounted at an appropriate rate and agreed upon by a willing buyer and seller. Those future cashflows will be taxed as income, and the capital gains therefore represents a second tax on those cashflows.

“The real world, contrary to models, suggests the capital gains rate is not a cause of unaffordability. New Zealand doesn’t have a capital gains tax at all, yet its housing affordability is starting to increase due to non-tax measures undertaken by the Ardern government.

“You also need to consider what taxing capital at a higher rate would do to other sectors of the economy, like venture capital where increase risk is compensated for by anticipated capital returns. There are already significant barriers to investing in Australia, and nothing to stop investors taking their money to countries with a more realistic attitude to capital gains.”

Mr Young said that modelling which purported to show losses to government because of negative gearing and lower taxes on capital typically left out a number of factors.

“When you borrow to buy a house the income from the house doesn’t decrease, it gets shared between the borrower and the lender. The models normally never assess the tax that is paid by the lenders on that income, which will be similar to the deduction being claimed by the borrower.

“The models also neglect the fact that the higher rate of borrowing made possible by negative gearing actually leads to more houses being built than would otherwise be the case. If borrowers had to be positively geared, they’d borrow less, it would be harder for them to get into the market, and there would therefore be fewer investors and fewer rental properties.”

Mr Young said this was implicit in the suggestion by the senators that the money “saved” could be spent by the government on social housing.

“In fact, what they are suggesting is that money be taken away from an extremely efficient class of landlords who will generally spend a lot of their personal time at no charge looking after their investment, to an extremely inefficient class of landlords with 37.5 hour working weeks – the governments of Australia.”

Mr Young said that the models also neglected to account for the additional GST that would be paid on the sale of houses, plus the various taxes paid by the companies and tradesmen who will build them.

“There is also a naïve idea that if investors don’t buy houses, renters will, and home ownership will increase. People rent because they can’t afford to buy. Reducing the number of rental properties won’t reduce the number of renters, just the number of rental properties, which will increase rents, making it even more difficult for home buyers to save a deposit.”

Mr Young expressed concern that the Parliamentary Budget Office now appears to be modelling policy solutions.

“This organisation was supposed to be an independent source of costings on policies produced by parliamentary political parties and independent members. If it is now advocating for particular policies, then it is no longer independent and cannot serve its proper function.”

Mr Young suggested senators Lambie and Pocock take an overseas trip.

“New Zealand is solving its affordability crisis not by fiddling with its tax system or government housing, but through planning laws. You can also see how effective this is in various states in the United States and compare to states that think the solution is higher taxes.

“Of course, another solution would be to use their balance of power in the Senate to press the federal government to reduce immigration to Australia, which has turbocharged the housing affordability crisis we were already facing.”