Budget's bank slug flouts the property precipice

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The Federal Budget was a fairly unremarkable mix of the politically expedient and the overly optimistic. Treasury forecasts of budget surpluses — in fact, Treasury forecasts generally — have proven to be speculative at best. So the forecast that the budget will have a $29.4 billion deficit next year but return to a $7.4 billion surplus four years later should be taken as the blindfolded punt it is.

Banks logosTrue, bracket creep will inexorably lead to higher revenues. Income tax receipts are expected to rise by 8 per cent this financial year and to be a third higher by 2020/21. But there will be a deterioration of the projected deficits in the short term and the assumption that wage growth will increase from the current 2 per cent to 3.75 per cent is courageous, to say the least.

Of far greater interest is the $6.2 billion the government will raise through a 0.06 per cent levy on bank liabilities. This is intriguing, and not just because it shows how out of favour banks have become, in large part because of the seminal exposes by journalist Adele Ferguson into their rapacious practices.

It is also, in effect, a de facto tax on property lending — something of a counterbalance to the negative gearing and capital gains tax breaks on property lending, which the Grattan Institute estimates allow investors to reduce and defer personal income tax, at an annual cost of $11.7 billion to the public purse. That $11.7 billion equates with over 5 per cent of the income tax expected to be collected in 2017-2018.

The reason it is a tax on property lending is that nearly all the banks' loans are either mortgages for housing, or business loans secured with property. Of course the banks will pass all the extra cost on to their customers, so it becomes a tax on borrowers.

To give some idea of the aggregate picture, Australia's GDP is $1.34 trillion. According to Corelogic, the value of Australia's housing market is approaching $7 trillion. In aggregate, the housing market is not highly leveraged. According to Domain, last year the amount of money Australia's home buyers owe their banks rose above $1 trillion (the equivalent of a debt-to-asset ratio of about 17 per cent).

But what it means is that the local asset markets are heavily skewed toward housing, which is inherently unproductive, because the value of such assets is principally in the land, not the house. Housing is worth almost triple the value of the Australian stock market — and in any case more than a quarter of the value of the stock market is the banks, whose business is based mainly on lending to property.

Australia, in sum, has become one giant housing play. So much so that even the Reserve Bank is talking about a property bubble, and central banks are usually reluctant even to acknowledge the existence of such a thing as a market bubble.

 

"The out of control housing market means that the country has become, in effect, asset rich and income poor. Or, for those who do not own property, just poor."

 

As the distortions of Australia's housing market become greater, we can expect a greater focus on how to remove the imbalances that are occurring as a result. By far the best plan is Labor's proposal to remove the negative gearing that has encouraged a generation of investors to put their money into a loss making investment, thinking that they are 'winning' because they get a tax deduction. It is hard to think of a better way to ensure that there is insufficient capital for more productive investment, innovative or otherwise, than using taxation to skew the financial system towards investing in land.

The Coalition has ruled that initiative out. Instead, it has to some extent made property investment less attractive, but mainly for owner occupiers, who will simply be slugged more. Investors will be able to use the extra fees from the banks as a tax deduction.

The out of control housing market means the country has become, in effect, asset rich and income poor. Or, for those who do not own property, just poor. To give an idea of just how income poor, Australian household debt is over 120 per cent of GDP, a situation that is only tenable because of low interest rates. Even if the assets households own are 'worth' more, it is still an extremely perilous financial situation.

Taxing the banks more might help the budget on the margin, but the biggest issue remains unaddressed. What to do about a country that has become one giant property play?

 


David JamesDavid James is the managing editor of businessadvantagepng.com.

Topic tags: David James, Budget 2017, banks, taxation


 

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Existing comments

David you are mixing up the issues. The banks should pay a higher tax because they benefit from an oligopoly structure that ensures profit. Our banks generate the highest ROE's in the world. The second issue is housing supply and demand. All bubbles burst. When this bubble bursts it will be a very painful process for Australia and the government will most likely have to bail out the banks ... Australians do not believe that we can see a USA style precipitous fall in housing and the subsequent foreclosure activity but these are the things that the RBA is concerned about - i.e. Financial stability of the nation. They are worried because House Hold indebtedness numbers tell them they should be worried. Yes, either party should phase out negative gearing over time but neither party has had the courage because it will affect their base. Negative gearing is widespread in the middle class of Australia and so both parties are content to see those at the bottom of the economic pile endure higher home and rental prices. The second demand factor is foreign investment. Let's call this for what it is : Chinese Communist Party members laundering totalitarian regime money into foreign jurisdictions to safeguard capital. The budget policy increases holding costs to make it uneconomic. That is also a sensible approach. It's a mess and it's not easy to fix. It needs attention. The fallout from the USA was that the pension funds and investor groups purchased homes across the nations at rock bottom prices and now control housing stock at the margin.
Patrick | 11 May 2017


A very clear summary, David. The decision to place a levy on the banks is strange. The banks are clearly making big profits but there is no suggestion I've seen that they do not pay tax correctly. There are corporations and wealthy individuals who are rorting the tax system. Why not put a levy on them instead?
brian finlayson | 11 May 2017


Could I suggest that Brian`s idea of a levy on the rich should be a residential LAND TAX? This needs to be as progressive as possible and perhaps, for example, may be just on the percent of the property for those with a mortgage for a family home that represents ones equity. As a country we need to be much cleverer in our policies and our politics. Unfortunately, because we almost certainly will not be, a crash seems inevitable.
Eugene | 11 May 2017


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