Ross Gittins nailed it perfectly yesterday when he noted that Australia is a country essentially run for the benefit of (usually indebted and older) home-owners, who are subsidised by a voiceless class of (generally younger) renters.
There are the obvious inequalities that the wealthy land-owning class receive, largely through our discriminatory tax system. The most significant, but rarely mentioned, is the capital gains tax (CGT) exemption for your principal residence. There is no justification for this outright theft from non-home-owners and which transfers tens of billions annually to land owners. The principle CGT tax exemption is all the more outrageous given a material reason for land prices increasing is infrastructure spending, which is paid for by all tax payers but capitalises to landowners only. There’s also the more obvious and widely reported negative-gearing rort, which is more idiotic but actually far less costly.
But arguably the greatest unfairness being propagated on non-homeowners is the stance taken by the RBA in keeping interest rates at a record low of 1.5 percent, well below their natural level. This acts to further transfer wealth away from savers and those who don’t borrow towards the segment of society who chose to borrow (often beyond their means) to purchase a property.
The continued ranting of my usually very astute learned colleagues, Dyer and Keane, is an excellent example of how even intelligent observers can utterly lose the plot when it comes to housing. Keane and Dyer pen a weekly vicious critique of the AFR, and inflation hawks like Warwick McKibbon, for suggesting interest rates be raised above all-time lows. Quite simply interest rates remain lower than level of even reported inflation, that means in real terms, savers have to pay to place their money in the bank, and the indebted borrowing class have seen their assets falsely appreciate in price.
In a properly functioning market, those who save money are rewarded in a small way. Those savings should be used to grow the productive base of the economy. To ensure people are incentivised to save, the rate of interest needs to be set at the appropriate level (which historically is a few percent above the prevailing inflation rate to compensate savers for their opportunity cost). When rates in real terms are negative, that means borrowers are getting too good a deal, and savers are getting screwed. The other direct effect of having an interest rate setting that is too low is that the price of assets like housing and shares increases as speculators try to increase their yield.
This is why the massive appreciation in house prices over the last 20 years has almost nothing to do with supply (it very rarely has in any global property boom) but has everything to do with how much banks are willing to lend and the associated cost of that debt. It’s no surprise that the boom has directly correlated with the drastic increase in mortgage debt compared to GDP. The recent (very small) drop in house prices similarly has come from banks starting to slightly tighten lending practices, from utterly irresponsible to just very irresponsible. As a result, the RBA’s policy of keeping interest rates at a historical record low means house prices appreciate more, this makes housing even more unaffordable for the young and sees the gains flow into the pockets of wealthy baby boomers.
Last week, Keane and Dyer bemoaned in their diatribe against the mere thought of an interest rate rise from record low levels, that “[we now have] the kind of economy that we were told back in the 1980s and 1990s by reformers and business was exactly what we needed: low inflation, low wage growth, high employment. Now we have it, and no one’s happy about it.”
Wanna know why no one’s happy about it guys? Because we have a mirage of economic success based almost solely upon excessive use of debt to bid up the price of a totally unproductive asset (housing) that has largely been caused by the RBA failing to set interest rates at the correct level for six years. And that so called great economy has been created to benefit one specific cohort of society – people aged over 40 who own property.
There has been a war waged (very successfully) by both major parties against everyone under the age of 40. Their artillery is a grotesquely unfair tax system and a moronically low interest rate regime, which encourages reckless behaviour and has also ensured land-owners profit at the direct expense of those who were too unlucky or too young to own a property. And their foot soldiers in this war are existing home owners, just like Bernard, who want to ensure the price of their main asset doesn’t fall low enough to allow a 30-year-old to be able to afford it.
Adam Schwab is a former lawyer and current company director and angel investor, and the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed.
Crackerjack. Come on now BK & Keaney, you can’t let that ball-tightening serve whizz by without at least squaring up & having a swing. Unless you recognise it for the unanswerable ace that it is, of course…?
This inter-generational equity bullshit misses the point. The LNP runs this country for the benefit of big corporations and the only way individual citizens benefit from that is via superannuation or private share portfolios and baby boomers do dominate that benefit.
I’ve been sitting here trying to work out what’s wrong with this article. It strikes me as a lazy and, to those of us who are part of the so-called ‘baby boomer’ generation, rather offensive piece of social and economic “analysis”. I was born in 1947, studied and worked for 44 years, paid my taxes, supported progressive causes, and was occasionally an activist. But now I find, I have become one of the ‘enemy’, part of a generation which has taken the goodies, and left our children and grandchildren in the economic shit. Well, sorry I don’t buy this argument for one minute. Is the concept of a ‘generation’ a useful way of understanding the concentration of economic and political power in Australia? I think not. It is a construct, and using it distracts attention from potentially more useful ways of looking at the problems facing Australian society, such as class, political elites, the political class, etc. And like all concepts, it sweeps up a whole grab bag of empirical instances which are very different. For example, baby boomers, even if they are lucky enough to own their own homes, are not all the same. They have different economic circumstances, and most have as little control over what the political class and captains of industry get up to as the so-called ‘under forties’. So, back off when it comes to mindless generalisations about the so-called ‘baby boomers’, and start doing some serious analysis about what is going on at this stage of the development of the capitalist society we live in. The use of ‘generation’ as a way into this issue is misguided, and just serves to distract attention from the deeper structural issues at work.
As well as the absence of CGT on the sale of the family home, you get to live in it without paying tax on the benefit. To even up with the young who are forced to rent, those who live in their own homes should pay tax on the imputed rent of their dwellings. And land tax to pay for the infrastructure that has made their property so valuable. With these reforms we might see fewer of the wealthy and the old ratterling around in massive houses that are designed to invest in, rather than to live in.
Are you really suggesting there should be a tax liability by living in your home?
Theft is taking of property from the owner with no intention of giving it back. How can an owner of the property commit theft by keeping their property and using it as one desires. What the author is saying that the owners should be robbed of their property because the people who don’t own the property want it . No wonder the author had to give up being a lawyer.
Young people like young people throughout human existence have to deal with what they are born into. If you are tribal you have to deal with the elders. The middle classes in Australia have been devastated by the discriminatory tax system and government charges.. The CTG system is one of the termites undermining middle class finances. FBT [Fringe benefits tax] undermines the workers because a company cannot reward their workers without paying 20% tax on the reward. So good workers miss out. Yesterdays article on retail spending illustrates the plight of the middle class. look at the graph – compare that to the feckless spending [e.g. My Health debacle] of the governmen and the graph is exactly the opposite- unbridled spending [$440million to mates at dinner, another Commissioner for in-grown toenails etc]. So robbing the property owners for the young does not solve the existing problems – Good Government would.
All FBT does is remove incentives for employers to facilitate tax avoidance by its employees via payment in kind. Its entirely sensible policy. And there is no 20% rate applicable, it grosses up the cost of the benefit to the employer based upon the highest personal marginal rate.
A benefit to a worker is not tax avoidance – it is a reward for work well done. The employee still has to have the legal wage, super etc to live
That’s like saying wages to employees shouldn’t be taxed. Remuneration, whether paid via cash or noncash benefits, need to be taxed. This really isn’t controversial.