Property market facts are stubborn things: GetUp's Mark Connelly

The arguments Terry Ryder presents need to be anchored in facts, he urged last week, and we couldn’t agree more. The subject of Mr Ryder’s piece for Property Observer was about recent GetUp email on negative gearing and unfortunately the facts of the matter were the first casualty. 

Getting into the policy nuances of an issue as complex as housing affordability is challenging in a blog. What we have to do is cut through the haze of complexity, often used by politicians and lobbyists to diffuse popular calls for reform, and get to the heart of the issue in clear language, anchored in the facts. With the luxury of a few more words, let’s go through Mr Ryder’s statements compared to GetUp’s, and see which way the facts fall.

1. Mr Ryder said we were wrong to claim “millions of first home buyers” were priced out of the market, because: “Australia has 8.6 million households, of which 6 million are homeowners and much of the rest (according to the research) are renters by choice.”

Mr Ryder was looking at household data, not individuals - but if you look at individuals, the last census in 2011 found about 2.3 million people in Australia rent (and that figure doesn’t include the people who want to buy, but are living at home with their parents rather than renting). 

Mr Ryder does not provide any reference to the “research” allegedly showing most of these are “renters by choice.” However, a November 2014 report by the The Australian Housing and Urban Research Institute, under a section titled “deferring, not rejecting purchase”, shows renting for longer to save for a later purchase is one of several approaches would-be homebuyers are using to deal with higher prices.

It’s difficult to know for sure how many renters would rather be home owners, so we probably should have qualified it by saying “potentially” millions in our email, but when you look at the numbers and the research there are plenty of clues to suggest millions of renters would rather own their own homes. 

2. He claims, “25% of all current residential sales are to first-time buyers.” 

That’s wrong. The Australian Bureau of Statistics Housing Finance figures for April 2015 shows first home buyers made up just 15% of residential sales. The last time first home buyers made up 25% of the market was nearly five years ago, in October 2009. In fact, this precipitous drop in less than five years supports the proposition that would-be first home buyers are being pushed out of the market.

3. He questions the link between negative gearing and housing affordability, saying, “An 18-month federal parliamentary inquiry … couldn’t provide any definitive evidence that it did.”

Research from the Australian Bureau of Statistics shows housing finance for investment properties rose from 16% to over 40% over the past 25 years, with the proportion of people renting increasing over that period, too. In particular, rental loss reported through negative gearing exploded after the capital gains tax discount was introduced in 1999. All this points to more investors in the market bidding up the price.

4. Though it’s not a key point in our email, Mr Ryder takes issue with the implication that investors are buying a second or third property, referencing ATO data showing “three-quarters of investors own only one property.” 

But that ATO data refers to investment properties. Mr Ryder forgets most people who buy an investment property are also owner occupiers. So when they buy an investment property, it’s generally their second property.

5. Mr Ryder says “the [GetUp] claim about ‘a skyrocketing housing market’ is patently absurd, given that only one of the eight capital cities has a boom market.” 

If that’s true, we’re not sure what all the fuss is about in the media, every single day. But let’s look at the figures and listen to the experts.  

A fascinating article on 15 April by ABC Business journalist Michael Janda quotes:

• RMIT housing expert Emeritus Professor Mike Berry: "Housing prices more or less doubling over the last 10, 12 years in the capital cities.”
• ABS statistics: Australian capital city home prices rose 68% over the past 10 years, and 125% in the decade before.
• BIS figures: over the last 40 years Australia has seen stronger house price growth than anywhere except Norway.
• International property analysts at Demographia: Australia is one of the world's least affordable places to live, with their measure of median home prices to median incomes showing all five of Australia's biggest cities are "severely unaffordable," with Sydney and Melbourne in the world's top 10, along with Tweed Heads.

According to the International Monetary Fund, Australia has the third highest house prices, relative to the level of people's incomes, among 24 advanced economies.

Even if you limit the discussion to the Sydney and Melbourne property markets, that’s where more than nine million Australians live. Other capital cities, like Perth and Brisbane, have also seen dramatic price rises at times within the past 12 years (more than doubling and a 75% increase, respectively) that have made it very difficult for first home buyers. 

6. Mr Ryder disputes this statement: “A massive $4.2B in negative gearing tax breaks per year go to the top 10% of income earners.”

The $4.2 billion in tax breaks for the top 10% of income earners is the combined impact of the negative gearing and Capital Gains Tax (CGT) discount - we should have said this in the email (and have since done so on the web page). That figure comes from the GetUp commissioned Australia Institute report, ‘It’s the revenue stupid,’ released in May this year, which was cited in the email.

The wider issue is how negative gearing interacts with the capital gains tax discount to drive up prices. It is the two policies working together that makes property investment so profitable and means that more and more of it is happening. For this very reason, scrapping the capital gains tax discount is also part of the GetUp/Australia Institute policy recommendations. It is simply too difficult to tell that entire story in one blog (and many in the media have had the same difficulty), though we have information about it online.

7. Mr Ryder then cites ATO data to argue that most Australians who own an investment property earn less than $100,000. 

On this point it is essential to understand that one of the core purposes of using negative gearing is to reduce the investor’s taxable income (i.e. below $100,000, or $80,000, the marginal tax thresholds).

As ABC Business Journalist Michael Janda explains, “the “ATO's measure of ‘total income’ includes net, not gross, rent - that is, rental earnings or losses after deductions such as interest payments have already been removed. The very reason that many housing investors fall below the $80,000 threshold is because they have used negative gearing to slash their tax bill.”

For this reason, both Mr Janda and Greg Mckenna (in an article for Business Insider), point out that the HILDA survey data, used by the Reserve Bank of Australia (RBA), is more accurate. According to the RBA (as cited in Mr McKenna’s piece), “investor households with incomes in the top 20 per cent of the income distribution owe the bulk of the investor housing debt and over a quarter of total housing debt outstanding … The bottom 20% [of the income distribution] account for just 2% of investor housing debt.”

For further reinforcement, Professor Judy Yates, one of the country’s most respected housing experts, who was seconded by the Australian government to work on their National Housing Strategy, said: “the biggest benefits [of negative gearing] go to high-income households, lowest benefits go to lower-income households."

8. Mr Ryder next takes issues with our claim there’s a “consensus among housing experts and economists that negative gearing is one policy area driving unaffordable housing.”

In arguing this, he says only a minority are concerned about negative gearing, and describes highly respected economist, Saul Eslake, as being part of the “lunatic fringe”. (Who knew the chief economist at Merrill Lynch could possibly be considered fringe?) Nevertheless, here are a few other notable ‘lunatics’ who have shown concern about negative gearing:

• Former Governor of the Reserve Bank Bernie Fraser 
• Former Commonwealth Bank CEO David Murray 
• ANZ boss Mike Smith
• Australian Council of Social Service 
• John Daley, CEO of the Grattan Institute 
• The Australia Institute 

We’d run out of pixels if we completed the list.

9. Mr Ryder claims “the GetUp campaign is based on the notion that eliminating negative gearing will somehow make housing cheaper.” 

Except, that’s not what we said. The GetUp/Australia Institute policy recommendation was to limit future negative gearing to new properties, which currently represent only six per cent of the value of negatively geared purchases. By driving investment dollars into new properties, the idea is to stimulate the creation of additional housing supply, which can help reduce prices and rents, as well as create construction jobs. This is also an approach that’s been put forward by the McKell Institute and is reportedly being considered by the Labor party.

But, to take Mr Ryder’s point on more directly, the logic is pretty straight forward. Reducing the tax incentives for investors buying second hand property will reduce demand for that property and therefore put downward pressure on prices. 

10. Finally, Mr Ryder takes issue with our reference to the property bubble. He says, “What we have seen throughout history is that boom markets eventually stop growing and prices level out. But we have never seen a crash, not in the history of this nation.”

In fact, RBA data shows several precipitous price drops in the history of the Australian property market, including in 1891 and the Great Depression. And if we go just a bit outside the direct experience of our nation, the entire Global Financial Crisis was triggered by a property bubble and crash in just one country - the United States. As a reminder, that included the near collapse of some of the largest financial institutions in the world (only prevented through massive government intervention) and recessions in most industrialised nations of a scope and duration not seen since the Great Depression (prevented in Australia only by a $52.4 billion stimulus package). So property bubbles and crashes do happen and they can have pretty dire consequences.

Tens of thousands of Australians have signed the petition calling for reform to negative gearing - we’re disappointed to hear Mr Ryder doesn’t support it, but GetUp’s member driven, which means if members don’t support a campaign they are free not to. We welcome constructive criticism, but as Mr Ryder said, it needs to be grounded in the facts. 

Picture this: 43% of Australia’s wealth is held in real property now, compared to 30% of America’s wealth in 2001, just prior to the Global Financial Crisis. Australia also has just four banks holding 75% of all Australian mortgages. So, if you want to talk about systemic economic risks, then the property bubble would have to be at the top of your list. With that in mind, it makes sense why Saul Eslake, the RBA Governor and the Treasury Secretary, among others, have been so concerned.

In the context of so much risk, the burden is on Mr Ryder to explain what magical mechanism would prevent the Australian housing bubble from a price crash.

Mark Connelly is GetUp's Campaign Director. GetUp can be reached here.