First, can I congratulate Urban Taskforce for holding this debate, it is an important debate. Andrew went hard, personal and partisan early, so I’ll do the same. And no I don’t have any negative gearing Andrew, for the record.

 

But, let’s be clear. I think there are few debates that characterise the difference between the two sides of politics, and the economic debate more generally, than this one.

 

On the one hand you have a tax and spend position. A position that says, the size of the pie is fixed you just need to slice it differently. You can burn the pie, you can throw it on the ground, you can throw it at each other but it won’t shrink and it will be no less edible. And that is the position of Labor on so many of the tax based issues.

 

Our position is different. We think that when you play with policy you change the size of the pie. You have to think about that first and foremost, and this issue is exactly one of those issues. It is highly sensitive.The size of the pie, economic activity, investments, savings, aspirations at the local level – peoples' aspirations to get on and do things and create opportunities are affected by policy.

 

This is our fundamental position, and that really is, what I think defines the divide we are seeing in the debate at the moment.

 

Now, at the more detailed level on negative gearing, I think there are two fundamental questions we need to answer:

 One is: Will abolishing negative gearing improve housing affordability or just destabilise the market?

 And the second is: Will abolishing negative gearing increase fairness or worsen it?

 

They are the fundamental questions, and Andrew tried to answer both of those. I’ll try to give a more complete answer.

 

Starting with housing affordability. Some of you may have seen Scott Morrison talk only an hour ago about a piece of work done by a consultant that showed clearly that there will be about a 4 per cent reduction in the value of housing on the capitilisation of the losses.

Similar work to what Grattan did, but for some reason they got a slightly lower answer.

 

But what is very clear – everyone is agreeing there will be some impact on house prices. I’ve been trained in economics, but I’ve also worked in the commercial world. If you really want to know what is going to happen in the market you don’t just capitalise the gains you don’t do it at the net present model, you have to step into the real world. And in the real world right now, we have a housing market that is worth about $5.6 trillion. We’ve got house prices in Sydney, in the centre close to $6,000 or $7,000 per square metre and even on the periphery about a $1000 per square metre.

 

We’ve got well over $2 trillion in household debt, much of this mortgages for people’s own homes or investments. And it is skewed to younger and middle-aged people.

 

This is a market ripe for destabilisation from bad policy.

 

The sort of policy change that Labor is talking about would destabilise the market. We cannot afford to destabilise when we are going through the economic transition we are at the moment. That is a fundamentally important position.

 

You have to get away from the theoretical tax policy you heard from John Daley, and the policy position that Labor has taken without understanding the market. All of you in this room understand that market well.

 

Now, if the market were to experience a sharp correction as a result of Labor’s policy it would not make housing more affordable.

Because the truth is that housing affordability depends on more than house prices. It also depends on credit and sentiment. And we know that if there was a sharp correction – destabilisation of the market – credit would be far less available.

 

The sort of destabilisation that Labor risks with this policy will not help affordability but will certainly impact someone’s net worth if they own a home.

 

So what do you need to do if you want to improve affordability?

 

It is simple, every economist knows, we need to increase supply. And that is what the Coalition’s policies are directed towards.

 

You may have heard yesterday that we announced the next step in our cities policy, a City Deal for Western Sydney.

 

These are about integrated planning and development, coordinated across all levels of government, increasing financing for infrastructure including innovative financing approaches and reducing costs in the construction sector through actions like reestablishment of the ABCC.

 

All of these things we know will provide the supply response that the housing market so desperately needs, particularly in those cities where we have seen very elevated prices.

 

There is no shortage of third party agreement with that position. Whether it is the Real Estate Institute or the MBA or indeed, even Wayne Swan, who in 2010 said that it would be economically disastrous to do anything on negative gearing. Wayne Swan, No less.

So the second question is: Will negative gearing increase fairness or worsen it?

 

Now, some see any increase in tax as good for fairness. This is the slippery slope this argument. It says: most taxes are paid disproportionately by the wealthy, so if you reduce taxes it is regressive. This is a slippery argument to run with. Not only is that argument in many ways flawed, because it ignores the fact that lower taxes can drive investment, savings and activity, but in this particular case, I think there is strong evidence to say that fairness won’t be improved in any way by abolishing negative gearing.

 

There are several aspects to this. This first is very clear, there is strong consensus – and I think John Daley agreed with this – there will be an impact on renters as a result of this policy.

 

The intuition here is very, very simple. If there is less investment, if there is less encouragement for investment, the cost of capital of investors goes up and rental costs will go up as well. We have seen lots of modelling to support that. Typically the numbers are between 5 and 10 per cent.

 

Grattan has done an exercise in looking at a couple of data points from 1986 to 1988, which I think was a deeply flawed analysis. The higher quality analyses have been very clear: you will expect an increase in the cost of renting. And who pays rent? Younger people and lower income earners. So to say this is a fairness measure is really quite extraordinary.

 

We also know that the young will be hardest hit. The average property investor under the age of 35 has a loss of just under $5000. The average property investor over the age of 35 has a loss of only $1200; $1261 to be exact. We know that the younger investors will be hardest hit.

 

We also know that some of the wealthiest will be able to avoid it. To go to the facts, the top ten per cent of people on the income range – above about $100,000 – the average rental losses are about $14,000. Ninety per cent of that can be offset against their investment income. They will be able to offset that against their investment income. So in other words, they will not be hit by this change. Whereas someone on a lower income does not have the investment income to offset their losses.

 

The final group that will be hit hard, and this is a group that concerns us perhaps more than any other, is people setting out to start a business. If you are setting out to start a business you will often be in a position where you will take out a personal loan against a property, and typically you might keep a part time job. You will be in a position where you will not be able to make the offset that you need to be able to get into that business. This concerns us deeply.

 

The aspirational, the ones who are trying to have a go, who are trying to save, who are trying to build a business, are the ones that will be most unfairly hit by these changes.

 

Whether you measure this on fairness, or you measure it on a housing affordability issue, it is very clear to us that this is a not measure that is good public policy.

 

Thank you.