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Negative gearing and CGT concessions a risk to financial system: Chris Bowen

April 13, 2017

Negative gearing and CGT concessions a risk to financial system: Chris Bowen

Laura Tingle, The Australian Financial Review, 11 April 2017

Negative gearing and capital gains tax concessions are feeding a speculative bubble in housing which poses a systemic risk to financial stability, according to shadow treasurer Chris Bowen, ramping up Labor’s pressure on the government over its refusal to move on the tax breaks.

Writing in The Australian Financial Review, Mr Bowen says while negative gearing and the capital gains tax discount on investment properties need to be reformed on the grounds of housing affordability and budget repair, they also pose a risk to the stability of the Australian financial system.

Treasurer Scott Morrison has made clear the government is not going to move on negative gearing and has argued this week that the investment housing market is built on the search for capital gains and that the government cannot do anything that might discourage the Mum and Dad investors, who dominate the market, from continuing to invest in it.

Mr Bowen cites the federal government’s own Financial Systems Inquiry – headed by David Murray – as the source for the assessment of the risks the tax breaks pose to the financial system’s stability as well as the International Monetary Fund and the Grattan Institute.

“It’s now been 28 months since the government received its Financial Systems Inquiry (FSI) report”, Mr Bowen says.

“Despite tax not being part of the terms of reference, David Murray put up in big red flashing lights that negative gearing and capital gains tax concessions are ‘major tax distortions’ which tend ‘to encourage leveraged and speculative investment in housing’ and that ‘housing is a potential source of systemic risk for the financial system and the economy,'” Mr Bowen says.

“Mr Murray has recently confirmed he stands by those remarks.”

Mr Bowen says that two years on leverage continues to rise, hitting new record levels.

Volatility of housing markets

“According to the Bank of International Settlements, Australia’s household debt to GDP now sits at 123 per cent, the second highest in the developed world, way above the United Kingdom at 88 per cent and the United States at 79 per cent.

“And house prices in Australia’s largest cities have soared, with recent data showing prices are now rising at their fastest rates in seven years, 19 per cent in Sydney and 16 per cent in Melbourne over the last 12 months alone.”

Mr Bowen notes the IMF said last year that “the tax system provides households with incentives for leveraged real estate investment that likely amplifies housing cycles”.

The Grattan Institute had also argued that one of the undesirable consequences of negative gearing included both increasing the volatility of housing markets and “increasing the risks to the Australian financial system”.

“Yet the government continues to sit on its hands,” he said.

Mr Bowen said Treasurer Scott Morrison “is seemingly happy to leave the heavy lifting to the regulators, with APRA in recent weeks introducing more drastic measures to rein in the rapid increase in interest only loans”.

“The regulators are doing their best and we support their actions. But they can’t do everything. And they certainty can’t rein in the current distortionary tax settings. That’s the Treasurer’s job.”

The shadow treasurer said the Opposition would “always keep our remarks about financial stability carefully calibrated, and we’ll eschew shrill scare campaigns”.

“But we’ll also call it as we see it, that’s our job. And we see a lack of action on leverage and financial stability as a risk and a failing on behalf of this government,” he said.

Treasurer Scott Morrison responded by accusing Mr Bowen of contradicting RBA Governor Philip Lowe.

“Chris Bowen is directly contradicting the RBA Governor Lowe who actually made a point of saying developments in the housing market have not posed a risk to the stability of our financial system,” Mr Morrison said.

“Not content on wrecking the Budget and our AAA rating, Chris Bowen now wants to undermine our strong financial system, which would wreak havoc on our economy.”

“Labor does not have a housing affordability policy, they just have a plan to increase taxes and raise revenue.”