Finally a political party has come up with a half decent policy. You know it’s half decent because of the howls of protest by the rent seekers.
I’m talking about Labor’s decision to take the issue of negative gearing on existing property to the next election. They want to change it so it applies to new builds only. I’ll get to that in a moment. But first, a quick look at the markets.
This week kicks off in a lot better shape than last week finished. Markets bounced strongly in Europe and the US on Friday. Oil was behind the bounce. It jumped by a ridiculous 11% in Friday’s trading session.
Who would want to trade moves like that? Make a fortune one day; get wiped out the next…
While there’s not much point looking for the reasoning behind oil’s move, I would guess that the escalation of war in Syria might have something to do with it. Syria reckons Turkish troops crossed the border on the weekend in an effort to help forces opposed to the Assad regime.
In addition, Turkey bombed Aleppo, or at least the part of Aleppo that contains Turkey’s long time enemy, the Kurds. The US told them to stop (the US supports the Kurds), but Turkey ignored the instruction.
You’ll need to take a deep breath here, but the US supports the Kurds in Northern Syria because the Kurds are opposed to ISIS. ISIS, in turn, formed as a result of US and Saudi funding, which helped support various rebel groups trying to oust Syria’s Assad.
And, just to complicate things further, Russia recently joined in the biffo on Assad’s side. Its recent airstrikes against the Saudi and US backed rebels (not ISIS) has turned the tide of the war back in Assad’s favour.
If it all sounds like a dog’s breakfast, it is.
And why is the West involved?
The Middle East’s curse is that it is the most abundant place on Earth for oil. And, as an added bonus, it is also the focal point for three of the world’s major religions. What a combination.
It’s a tragic combination for Syrians…both for those left in the country, and the refugees spread around the world because of the fighting.
But the politics of power has never been any different. It is always the people that suffer tremendously for the power of the few.
Speaking of politics, the Australian scene just got a bit more interesting.
Ever since Malcolm Turnbull took the reins of the Coalition, there’s been a lot of talking but not much doing. They’ve talked about major tax reform, but interest groups and polling have scared them from actually doing anything.
That inaction created an opening for Labor. And they took it. On the weekend, Labor announced plans to limit negative gearing to new houses only, halving capital gains tax concessions from July next year.
This is an eminently sensible policy. It will save the budget billions and still encourage capital to go where it was intended in the first place — that is, the construction of new housing supply.
But the vested interests and property parasites are already out in force…ignorant teeth bared, mouths drooling.
Take the headline from The Weekend Australian. Now, keep in mind that News Corp, the publisher, also owns a large stake in realestate.com.au. So there’s clearly a conflict of interest. Check out the headline:
‘Labor’s hit on property investors’
So Labor announces a sensible policy that will save the budget billions AND direct a greater amount of capital into productive investment…and apparently it’s a raid on property investors?
That’s the power of the property lobby. Price rises are good, but any threat to that is an abomination.
The article states that the policy faces a ‘backlash from the property industry which has warned it could restrict the supply of housing in major cities.’
While that’s a laughable statement, given the intent of the policy is to only apply negative gearing to new builds (thus increasing supply), there is some truth to it. I’ll explain how in a moment.
The article also states that negative gearing and capital gains tax concessions cost taxpayers around $10 billion per year, which is more than the government spends on higher education. What’s more, only 7% of new investment loans go towards housing construction. The vast majority of negatively geared investment goes toward speculating on existing housing.
Now, with this in mind, listen to this statement by Stockland CEO Mark Steinert, quoted in the aforementioned article:
‘”Last time they cut negative gearing on rental properties, it was reinstated within a few months because it had such a devastating impact on the rental market.
‘”I can’t see how this will be any different…the affordability challenge is that you need more rental property, and negative gearing goes directly to meeting that.”’
Such a statement is breathtaking. Firstly, no one is abolishing negative gearing. The existing rules will be grandfathered (people can still claim a tax deduction on existing investments). Negative gearing will remain for new builds, which will encourage more supply.
To say that the abolition of negative gearing had a devastating effect on the rental market in the 80s is an outright lie. The MacroBusiness blog has refuted this property lobby claim with facts and data on countless occasions.
Stockland should be celebrating, because it will direct more capital into housing construction, which is what it does. So why is the CEO lying about it? What does he have to fear?
I’ll tell you…
Stockland is one of the largest land bankers in Australia. It has a huge amount of land on its balance sheet that it drip-feeds onto the market. Restricted supply and the current tax set up favours Stockland enormously.
It leads to a continual increase in land values, which increases the overall value of Stockland’s assets. Developing the land and selling houses is all well and good, but it’s the increase in land value that Stockland wants to see.
This is why Labor’s policy could restrict supply. The land bankers might just hold it back to create a supply shortage.
Labor’s policy (if they get elected) threatens Stockland’s ability to effortlessly earn the ‘rents’ from the land. Which is why they are called ‘rent-seekers’.
It’s also why Labor will have a tough time getting elected. There is a very powerful property lobby in this country. A lot of people make money off the land…not from working it — in the farming sense — but from not working it at all. They collect the rents and want policies, designed to increase land value, at the expense of productive investment.
Have you ever wondered why the Aussie stock market is so far below its 2007 high? I would suggest it has something to do with capital shunning productive investment, betting it instead on land price appreciation. And that’s because of the favourable policy settings that almost guarantee land price appreciation at the expense of everything else.
So good on Labor for trying to break this rent-seeking obsession that Australia has. I’m not sure whether they will get it over the line, but at least they’re getting people talking.
For The Daily Reckoning