Negative Gearing Policies and Housing’s Vested Interests

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As far as election campaigns go, this one has certainly been pretty demoralising. As much as I’ve tried to avoid the sound bites, and the ‘who won the day’ nonsense, the lies and insincerity manage to filter through.

While everyone knows the problem with democracy is that it leads to a slavish pandering to the lowest common denominator, in Australia it feels like it has gone to a whole new level. Peter Dutton talking about illiterate boat people taking jobs off hard working Aussies is a case in point.

Then there was Labor MP David Feeney who ‘forgot’ to declare a $2.3 million negatively geared house, and Greens leader Richard Di Natale who didn’t declare a joint interest in a farm.

This is just a snapshot of the moral fibre of our leaders. Get away with what you can get away with…and when you get caught, say it was an oversight, and move on.

With leadership like this, no wonder everyone is out to get what they can get. Ross Garnaut wrote a good piece in the Financial Review yesterday, pointing out the degenerate nature of the modern political process:

The governments of the reform era – Hawke, Keating and early Howard – were able to appeal successfully for majority support for changes that in themselves damaged some private interests, to advance a broad conception of the public interest.

Australia in that era now seems a foreign country.

Indeed it does. The country is crawling with vested interests, ready to shout down any policy at all that threatens the gravy train.

No one is thinking what they can do for their country…it’s all about what their country can do for them. As Garnaut points out:

Vested interests have become more effective at shaping policy. The policies that emerge from the democratic process today are more likely to benefit special interests over the broader community than they did in the past.

These changes have caused standards of living of large numbers of people across the democratic developed world to stagnate or fall – including in Australia since a new model of economic growth in China announced the end of the resources boom in 2011.

In other words, parasites are eating away at the host. The effect of this is a loss of living standards in the aggregate. Unfortunately, there is no end in sight. Australia’s Holy Grail — tax-advantaged property investment — is an especially contentious issue.

The line between politics and business is becoming increasingly blurred. From the Financial Review again…

As the head of Australia’s largest self-storage property owner, Sam Kennard relies pretty heavily on the buying and selling of homes around the country.

When people are moving to new houses they need more storage and in the current housing boom that converts nicely for Kennards.

It is little wonder then that Mr Kennard, who is now seeking a Senate position for the Liberal Democrats in NSW, has some strong objections to Labor’s policy of scrapping negative gearing.

Kennard goes on to say that changes to negative gearing would amount to a tax increase. Not quite. It would amount to the removal of a tax subsidy. A subsidy that is overwhelmingly utilised by the property industry. Which is why there is so much controversy and misinformation about its planned removal by Labor if it wins the upcoming election.

If you want to learn more about how the property market works in Australia, and how you too can take advantage of it, click here.

For example, today’s Sydney Morning Herald reports that a meeting took place between a senior property figure and Treasurer Scott Morrison, which resulted in the release of some dubious ‘research’ on negative gearing.

An email obtained by Fairfax Media shows Greg Paramor, the managing director of property company Folkestone, discussed the need for a study critiqueing Labor’s policy with Brian Haratsis, the executive chairman of advisory firm MacroPlan Dimasi. Mr Paramor, who is a friend of Mr Morrison and former president of the Australian Property Council, made the request after his encounter with the Treasurer.

With vested interests swarming over every policy announcement in Australia these days, perhaps the mark of good policy should be measured by the extent of the protest that accompanies it.

Would there be problems if Labor repealed negative gearing? Sure there would. A large part of Australia’s economic structure has formed around it. But that’s no reason to maintain it.

What we need are policies that genuinely enhance productivity growth. Such policies take time to work their way into the economic structure. There is always an adjustment period.

Vested interests will use this adjustment period as evidence of bad policy. For that reason, it’s unlikely you’ll see anything resembling decent policy for years to come.

As Ross Garnaut said, the reform era in Australia of the 1980s and 90s now seems like a foreign country.

Cheers,

Greg Canavan,
For The Daily Reckoning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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