PUG‑2003 20:33	JOHN.TURNER		P.01

Sabwinion to Ennui	John A Turner	L+
		
		27t' August 2003
The Chairman,
Productivity Commission
Dear Sir,
	re: House Prices for First Home Buyers
There is a multitude of factors that have caused home prices to increase
inordinately. However six are, in my opinion, of major importance.
Firstly there is the value placed on land when it becomes available for housing development.
This valuation seems to have no relationship to the value of the land for any agricultural purpose.
Speculation in vacant land is a case of the older generations taking unfair advantage of the young.
The young wore not about when a particular piece of land was available cheaper than it is now. The
basis for resumption of land for housing development needs to be reviewed and 1 would suggest a
basis of, say, a multiple of the land's average agricultural net profit over the last ton yews or the
land's last ownership transfer price indexed for inflation. A high proportion of the lots made available
when resumed land is subdivided should be reserved for fint‑home buyers with young families, There
would necessarily be clauses in the necessary legislation to prevent manipulation and bogus
transfers. We should avoid subdividing good agricultural land,
The second factor is George Soros' concept of reflexivity. Reflexivity is the practice of
overvaluing assets and then granting loans of a high proportion of the inflated value. This leads to
inflation in prices and a self‑fulfilling cycle.
The third factor is the rate of increase in the loam or assets books of financial institutions.
Allowing financial institutions to determine the rate at which they can create loans by letting them set
the rate at which they can expand their capital adequacy has led them to seek extraordinarily high
profits ftorn excessive charges. Those profit over and above that necessary for a reasonable
dividend can be added to their capital base, At a capital adequacy ratio of 10% each billion dollars of
excess profits each year allows the financial institutions to extend their loan portfolio by ten billion
dollars. For the last five years at least the banks have increased their loans by 12‑15% per annum
compound. 19 it any wonder that money has lost purchasing power in the housing asset market,
particularly while the share market has been in the doldrums both here and internationally? This
problem has been caused only by Commonwealth Government policy. It was John Howard who
commissioned the Campbell Report into the deregulation of the financial industry although the Hawke
Governinent put the Campbell recommendations into effect. I assume that the Frazer Ministry had
more sense. I could go on at length over this deregulation but the fundamental argument is that
money is not something that is produced in a manner similar to guns and butter, or subject to the
economic choices that the production of real goods entail. Creation of money is subject only to
prudential considerations and as such should be the subject to sufficient regulation to ensure that
money's is maintained reasonably steady. We need to move away from a self regulation system
based on capital adequacy ratio to something similar to the old statutory ratio and loans and
government securities holdings which allowed the government adequate controls over the money
supply as long as it applied to all lending agencies.
The fourth main cause is failure to effectively apply tax law in regard to negative gearing. The
Tax Commissioner has some power to ensure that interest charges are allowed as a tax deduction
only if there is the prospect of the activity being profitable in a reasonable time fMme. Allowing
those on high income to compete for properties, while their interest bill is tax deductible, against
home‑seekers for whom the interest bill is a non

27‑AUG‑2003 20:33	JOHN.TURNER		P.02

deductible burden is inequitable. One possible solution would be to only allow, for taxation
purposes, interest to be deducted from the rental income on an investment property up to a
fixed percentage (say 50%) of the rental income.
Fifthly, the divergence in the relative incomes of various occupations in this country is
leading to the situation where the highly paid are seeking safe investments for their large
savings. Paying executives in large corporations millions and specialist medical
practitioners, senior legal counsel, dentists and even accountants incomes of hundreds of
dollars per hour is bound to lead to the creation of a landlord or asset rich class and a
consequent underclass. If we are a society that believes in equal opportunity we need to
ensure that our income and our tax policies are such that equal opportunity is a possibility.
At just on 73 years of age and as someone who paid 66cents tax from the last dollar while
raising five children for many years 1 see no reason for making the tax rates less
progressive. I suspect that the adoption of a OST has compounded the reduction in the
progressive nature of our tax system, Any discretionary expenditure by those with low
incomes is now subject to taxation. One possibility would be the introduction of a gift and
inheritance tax file number for each citizen so that tax was paid on any gift or inheritance
once a threshold was exceeded. I suggest that an appropriate threshold would be about the
value of three years average income. Tax raised in this way could be used to increase the
income tax threshold and, reduce the tax rate on the last dollars particularly for those with
young families. Laws in relation to trusts and similar escape mechanisms would need
amendment. Property passing from a deceased to a long‑term partner would not need to be
subject to such a system. Taxation collected in this manner would serve to bring more
properties onto the market particularly those properties not needed for accommodation by
heirs.
Lastly the changes to the initial capital gains tax legislation have had effects that
were probably not foreseen when the changes were introduced. The original legislation,
introduced by the Hawke Government, was sensible in that only gains in excess of the
relative changes in the purchasing power of money were taxable. The move to the current
system has meant landlords and investors pay tax on windfall income at half the rate that is
paid on the same amount of income earned m wages or Wary paid in return for effort. This
is certainly inequitable. The system has also increased the attraction of property investment
I will expand further if necessary on any points 1 have raised, I look forward to
seeing if your review effectively tackles what is a thorny political issue.
I have appended a short description of my education and experience.

Yours sincerely

John Turner