Henry Ergas, points to adverse implications of the attack on tax deductability for housing which would both to raise tax and lower demand competition for owner buyers.
Whether or not housing investors are to be hit with taxes, both the Commonwealth and the Victorian State Governments have discovered housing as a new source of taxation revenue. In both cases the new tax slug is accompanied by claims that it is in accordance with the moral high ground.
For Victoria, Treasurer Tim Pallas claims that it restores fairness because foreigners did not contribute adequately to services and infrastructure. This would come as a surprise to those within the industry. CIE estimated the average direct tax paid for a new infill-located house in Melbourne at $56,000 with a further $27,000 in “ambiguous taxes” like excessive infrastructure charges (plus a further $66,000 in generic taxes). On top of this, an average foreign buyer tax of around $20,000 a property is to be levied.
The Commonwealth is even more affronted that foreigners want to buy properties here and alongside a modest fee of $5,000 to $10,000 comes an array of penalties, including three years jail for foreigners who surreptitiously buy properties in Australia.
The populist rationale for the tax is the notion that (Chinese) investors are driving up prices and by their entry into the market are depriving locals of affordable housing. The Prime Minister himself said, “I know from personal experience how tough it is to get into the housing market. I’m determined to crack down on any illegal activity that could be putting upward pressure on property prices. We want the rules enforced and we want Australians to be operating on a level playing field.”
So the policy ticks several boxes: it is a tax on the foreigner; it is justified by regular Australians creating conditions that make it attractive to invest here; it will reduce price pressures that prevent Australian residents from getting into the housing market. What could go wrong and why haven’t other destinations for Chinese wealth (US, Europe) thought about doing the same thing?
First, a tax on foreigners is discriminatory – it is rather like a tax on exports of iron ore designed to give local manufacturers a boost at the expense of foreigners; the whole national reservation policy for gas is being played out again and it a policy that the ALP is likely to adopt.
As with other policies, a regulatory policy favouring domestic buyers backfires. At best, if the supply is fixed, it reduces the price current owners can get for their assets, partly expropriating their property values.
But in the case of houses this does not apply. Houses are scarce and overpriced not because there is an intrinsic supply shortfall but because an accumulation of regulations has created such a shortage. House prices are excessive in all areas – US West Coast, UK, Australia – where regulations on land and buildings prevent supply from meeting demand. House prices are not excessive where – most of USA, Germany – there are few constraints on converting land into home sites. And Australia has far and away the greatest potential availability of land convertible into housing in the world. Yet prices here are among the dearest because of the regulatory induced shortage. As a result, over the past 40 years almost all Australians would have also had the difficult personal experience the Prime Minister had in getting into the property market. But far fewer Texans or Germans would have faced the same burden.
Secondly, in discouraging foreign investment we are closing off a new resurgent income creating opportunity. Australian house building is highly efficient (apartments are unfortunately controlled by monopoly building industry unions) and can be a source of economically viable, unsubsidised jobs. By placing a discriminatory tax on housing bought by foreigners governments are also acting at variance with free trade treaties which are supposed to “treat foreign investors and investments no less favourably than domestic investors and investments” and though there may be loopholes allowing differential treatment such provisions are in place to prevent distortions that favouring domestic investors bring about.
Sadly, the prevailing Australian fiscal policy approach is to find new sources of taxation rather than cuts in spending and such activity in the housing market both suppresses a viable industry and distracts governments from addressing the regulations on land and building which are the true causes of excessive housing costs.