John Alexander (Bennelong, Liberal Party) Share this | Link to this | Hansard source

Housing its people is a fundamental duty for every government. This is why, as chair of the House Standing Committee on Economics, I commenced a home ownership inquiry.

In a free enterprise system the marketplace operates best when unrestrained by government. Some may argue that the marketplace should have no encumbrances at all from government. When the inquiry started, however, many advised that negative gearing should not be touched, the suggestion of the use of superannuation funds to buy a home was stupid, and more, all of which flew in the face of the very reason to hold such an inquiry in the first place. The reason was simply to get all the facts on the table so an informed course of action can be taken—comprehensive analysis not inhibited by ideology or self-interest.

The argument that negative gearing should not be tampered with finds perfection in the counter-argument that the government should not interfere with the marketplace. This is a convenient position for those in the marketplace who are already advantaged by such measures—or, interference, if you will. When the housing market has worked best, the major factors have counter-balanced to establish stability and the stakeholders reasonably contained to an appropriate place. In this ideal situation, the number of properties investors could purchase was limited by their capacity to fund negative gearing losses against other income. This provided affordable rental accommodation for those who could not buy property. Investors constrained by their funding capacity left abundant opportunity for home buyers to compete with each other for their piece of the Australian dream.

So, when investors are advantaged by deductibility of all expenses and a preferable CGT discount, and home owners are not subject to CGT, and interest rates are significantly higher than rental returns, the housing market enjoys a stable period. It should be noted that the differences in tax treatment between investors and home buyers in no way equates to a free market and is far from a level playing field.

Recently, interest rates, at historically low levels, have had a profound impact on the housing market. We have seen the previous status quo destabilised by the uneven playing field now presenting a grade that is too steep for the home buyer. This impact has seen unsustainable price rises in major markets and the dominance of investors over home buyers.

Real estate prices are driven by speculation on continuing price rises over rental returns, resulting in prices of properties having no fundamental economic basis. An increasing cohort of investors can now speculate, through their ability to acquire properties unlimited by negative-gearing costs, as their rental returns now exceed the low interest rates. However, many lack the capacity to fund any increases in holding costs, should interest rates rise. The resultant need to sell would no doubt drive a very significant event.

Such an event will have a very far-reaching impact, from the over-extended investor needing to sell large portions of their holdings urgently, to the new investors—the teachers, nurses, police officer and ambulance drivers—who have limited capacity to fund an increase in interest rates. Imagine a move from 4 per cent to 6 per cent—it is actually a 50 per cent increase. From the mortgage holder to the investor who has bought at the top of the market, to those who have lent, all are vulnerable to this highly volatile situation. It comes down to a matter of who needs to do what to avert a catastrophe.

In 1996, the government authorised the RBA to act independently in regard to monetary policy, to contain inflation and to achieve stability of the currency, maintenance of full employment, and the economic prosperity and welfare of the people of Australia. The lever, often referred to as a blunt instrument, was to set the prime cash rate. The problem of tension between these objectives, with one lever aimed at achieving a prime target, has often created a collateral impact contrary to the RBA's responsibilities. The RBA's actions to reduce interest rates to historic lows in order to maintain inflation within the prescribed range has created a collateral impact of over-stimulating the housing market, thereby producing this volatile situation. These interest rates have focussed investors not on rental returns but on rapidly rising prices, which speculates the price of homes out of the reach of many, who are reduced to renting and therefore funding the investors ever-increasing holdings. (Time expired)