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catallaxy in technical exile

The unkindest tax cut of all?

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A generation of young Australians will struggle to afford their first home and cuts to capital gains tax are partly to blame, says Senator Andrew Bartlett.

According to a recent study by the OECD (pdf) Australia has by far the most overvalued houses in the Western world. As a result, says Bartlett, a generation of young Australians are unable to buy their first home while existing home owners are "dangerously exposed to high debt levels, which are secured against an over-priced asset."

The Australian Democrats senator, blames cuts to the capital gains tax for fueling the boom:

The ALP must also take some responsibility, as five years ago they allowed the Governments huge, inequitable cuts in capital gains tax to pass the Senate. By passing this change, the ALP and the Liberals gave a big windfall to the highest income earners and, combined with existing negative gearing provisions, encouraged investors to switch from shares and other more productive areas into property. This priced many home buyers out of the market, all of which has played a key role in Australia ‘achieving’ the top ranking of world’s most over-priced housing.

The OECD questions whether a boom as large as Australia’s is sustainable. The report notes that, worldwide:

Of the 37 large upturn phases between 1970 and the mid-1990s, 24 ended in downturns in which anywhere from one third to well over 100% of the previous real-term gains were wiped out.

Nobody’s predicting that Australian property values will half over the next year. But, just as an exercise, it’s not hard to imagine what would happen if prices fell further and faster than people are expecting. In any economic shift, losers exert more political force than winners. Existing home owners have been happy to see the value of their assets increase so quickly and effortlessly. Many of those who bought in later are hoping for a market that delivers more of the same. And no doubt part of the reason governments have not tried too hard to make housing more affordable is that the only real way to make housing affordable is to make prices fall.

If prices plunge home owning voters will react as if they’ve been robbed of hundreds of thousands of hard earned dollars. Chances are many of them would blame the same people they voted for last election.

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Written by Admin

December 2, 2005 at 2:31 pm

Posted in Uncategorized

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