16 October, 2003

Productivity Commission
Locked Bag 2, Collins St East
MELBOURNE VIC 8003

SUBMISSION TO THE PRODUCTIVITY COMMISSION INTO HOME OWNERSHIP.

Dear Sir or Madam,

I have decided to outline a few brief points that could be considered during 
this productivity commission inquiry.
A holistic approach will need to be taken to analyse the many factors 
influencing home ownership and affordability. This should ensure the 
outcomes achieved have the most chance of success.

The points I will briefly discuss include the following

TAX/ Government Policies

It is very obvious that first homebuyers are being priced out of the market 
by over eager investors who see all and any property as a goldmine! The onus 
seems to be on procuring a property for investment and collecting all those 
deductions. The losses seem to be the only criteria used in decision making. 
The returns on residential property are dismal. Commonly a 3% gross return 
is achieved. Without those generous deductions, a real estate investment 
would not be considered.
The government subsidizes these individuals through these deductions. ie has 
the effect of decreasing the marginal tax rate of the individual.
So that same individual who would readily criticize a social security 
recipient, arrogantly accepts this government handout. Yes I hear the 
outcry, but we all pay taxes-you and I  ..
This propensity to acquire all housing for investment decreases first home 
stock. The use of financial resources in such endeavours is unproductive for 
Australia. They could be utilised elsewhere as is so commonly argued.

RESIDENTIAL INVESTMENT NEGATIVE GEARING should be:
„h Abolished
„h Reduced by heavy  modification

The first point would not be palatable to the supporters of the government 
of the day. The obvious answer is to reduce the negative gearing 
arrangements with residential investment property. Reduce to a percentage 
the deductions available and reduce or preferably eliminate depreciation 
allowances. I.e. goal is reduce government SUBSIDISATION. If the investment 
is sound it will continue to be viable, if not it will have to be sold to a 
First homebuyer.

The new regime in CGT has fuelled the current speculative property bubble. 
CGT should have been reduced but over a greater period of time say four 
years on a sliding basis and only to the company tax rate level. This can 
still be achieved and should be considered.

The use of a home as collateral should immediately then make it obligatory 
that the house be then considered under the capital tax regime. (Only from 
the beginning of the initial investment and beyond). There is an unfair 
advantage to someone who has equity in his or her own home and doesn¡¦t have 
to pay capital gains tax yet readily claims deductions.

I am not niave and the issue that I have here is that this could prevent 
homes being used as collateral for REAL business purposes- eg a plumbing 
business. There may be a need for a waiver for these types of businesses; 
criteria could be it has to have a minimum of one employee: The employees 
are wage earners who would then spend their wages and allow the 
multiplicative investment effect to be fostered.
A special status for certain classes of investment ie-home collateral for 
residential investment would not be allowed ie excluded in this case. Seems 
fair!
With so many conditions and criteria this unfortunately would make the final 
scheme open to manipulation such, as is evident in the FHOG. Toorak 
Toddlers, as recently discovered, have an uncanny ability to exploit all 
available loopholes.

Stamp duty is a popular topic. I believe it should stay as it has always 
been there. It could eventually be reduced, especially for first homebuyers, 
but this should not be considered until the air is well and truly out of the 
bubble.
There should be no credence given to the self-interested and morally corrupt 
industry groups that continually air this topic. I would also prefer not to 
see the poor sod who has just purchased an expensive million dollar property 
on the front of a tabloid crying foul because they have just spent a huge 
amount on stamp duty. Buy a cheaper property!  These are typical of persons 
who rub their hands with glee as house prices rise but then realise they now 
have to pay a proportionately higher level of tax. Why not consider living 
on the street and not paying taxes at all!
One method to decrease the burden of stamp duty on the buyer could be to 
impose the liability onto both parties. They could equally share the stamp 
duty cost.
Briefly on Land tax: I feel for the older person who eventually is forced to 
pay when the threshold is reached, but I have no mercy for those investors 
who complain when their land tax liabilities increase from year to year. The 
investment rules are there for all to see and land tax is something that 
should be considered before purchase. The capital value of the house has 
increased and there is no inverse relationship between the two variables.

Lastly it ceases to amaze me how much lip service the RBA gives this topic. 
It is blatantly clear that it is not working.  It¡¦s objective is to control 
inflation. House prices have inflated, but they readily use empty rhetoric 
to attempt to pummel a monster that keeps growing. See all the current stats 
on investment housing. The weighting in the CPI may need to be adjusted.
The only defense they have is the housing industry growth provides a 
disproportionate level for growth to the economy, as does the loose supply 
of money from low interest rates. When they act the pain may be widely felt! 
I say that it would be better to act than talk. The monetary policy could 
act in tandem with fiscal policy initiatives such as the savings one 
mentioned below.

Finance

A recent report sponsored by the Menzies Institute encouraged the use of a 
new shared equity arrangement. It is ideas such as these coupled with the 
new innovative High LVR products available from institutions that encourage 
the use of easy money to finance purchases.
It seems that the money supply availability has been catered for in this 
innovation but the supply issue of property forgotten. I think that this 
would encourage prices in the market to go higher.
Why not encourage individual saving via the taxation system. No matched 
savings, no shared arrangements but rather a system whereby the first $1000 
or $ 2000 in interest earned would not be subject to tax at the marginal tax 
rate of the earner. THIS SHOULD BE MEAN TESTED, YES MEAN TESTED, A TERM THE 
CURRENT GOVERNMENT SEEMS TO HAVE FORGOTTEN. THIS COULD OCCUR ON A SLIDING 
SCALE FROM 50k TO 100K. Full benefit for up to 50K and no benefit for 100K 
and above. Other values could be discussed. This would encourage savings and 
reduce the reliance on our credit mentality. If they don¡¦t save then so be 
it. Renting is still and will always be a viable alternative. Intervention 
is sometimes necessary to massage the economic framework of a society.

Industry

This continual increase in house prices has increased and will continue to 
increase the cost of construction and maintenance. This coupled with a 
reluctance of younger people in selecting a trade, as a vocation will put 
pressure on Building work and prices. The standardization of building 
standards would be beneficial in reducing regulatory differences between 
states and hurdles in approvals.

The real estate industry should also come under scrutiny. At exactly the 
same time it discusses stamp duty and other punitive taxes it should also 
acknowledge that their commissions also affect prices. There is a lot of 
uncontrolled propaganda such as is evident in ads that should be more 
strictly controlled by an external body such as the ACCC preferably under a 
federal system. There will be cries of increased compliance costs but they 
will generally come from those with the most to lose. Those with nothing to 
worry about will happily comply.
When the bubble deflates, the result should be downward pressure on 
commissions, a nice positive.
..		---- INTEGRITY is the keyword here-------
No mention will be made of the media industry. They again make many claims. 
Any work that they do, should readily outline all audited costs and actually 
realistically estimate the timeframe for completion with a normally sized 
workforce.

Closing

I have intentionally maintained a qualitative perspective as much has been 
written and produced with regards to the housing bubble we are experiencing 
at the moment. Analysts that have plenty of time can readily collect this 
material.
I also acknowledge that this PC investigation after reading the terms of 
reference may just seek to transfer the perceived blame to local and state 
governments.
Unfortunately I am not naive and it is possible that this report will only 
fill a slot in a library, just like so many others, conveniently quoted when 
a shortsighted political gain can be made.

I hope my comments, along with the many other submissions, are considered 
and if feasible incorporated in the final analysis.
I wish it success and I hope that any useful recommendations from the 
commission report are implemented.

Waiting to BUY FIRST HOME!!!

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