Dutton thinks he can sell tax deductible housing to young voters. Good luck with that

A tax write-off for property? Where have I heard that before?

Launching the Coalition’s signature housing policy over the weekend, prime ministerial hopeful Peter Dutton said something along those lines while unveiling his plan to give first home buyers tax breaks on mortgage interest, to the tune of $12,000 a year for five years.

Peter Dutton formally announced the Coalition’s housing policy on Sunday.Credit: James Brickwood

The policy has distinct echoes of another such scheme brought in more than 25 years ago – one that helped turn Australia’s property market into an investors’ paradise and create the crisis we find ourselves in today. I am talking, of course, about negative gearing.

Though this financial manoeuvre was first introduced to Australian taxpayers about 90 years ago, most Australians associate negative gearing with John Howard and then-treasurer Peter Costello, who made the policy much more attractive and popular by halving the capital gains tax on all investment properties if owned for a minimum of 12 months.

While those changes were not the sole reason house prices subsequently skyrocketed, they certainly didn’t do much to help, and first-time buyers began to find they were consistently losing out to negatively geared investors on auction day.

Though the housing situation was bad before the pandemic, it became dramatically worse once COVID-19 hit and household sizes shrank, building and construction prices soared and post-lockdown migration to Australia jumped to unexpected highs.

Where once a home cost three or four times the median income, it now costs 9.1 times that in Sydney, and seven times incomes in Melbourne, while the national figure is 8.6. And let’s not even get started on how bad renting continues to be across all major cities and the regions.

Unsurprisingly, then, housing was a core issue for the entirety of the last parliamentary term (and an issue that helped propel Greens housing spokesman Max Chandler-Mather into parliament).

This is a big deal because for the first time, Millennials and Gen Zers will outnumber Gen X and Boomer voters in a federal election, with those aged 18 to 40 making up almost 50 per cent of all voters. And guess what their key issue is, according to a recent report from Monash University? You guessed it: affordable housing.

“Politicians beware: Millennials and Gen Z voters will make their decisions on the issues they are seeing affecting their community, rather than the colour of the shirts the candidates are wearing,” Monash University Professor Lucas Walsh said.

It’s a good thing, then, that both major political parties have recognised housing as a key election battleground. But it’s a pity neither of their policies will do an awful lot to help those who need it most.

While it is notable that both parties have also announced policies to try to address the supply side of the equation – Labor with $10 billion in grants and equity funding, the Coalition with $5 billion in grants and loans – unfortunately for federal politicians, housing supply is really a state and local government issue.

Labor’s other major plan is to expand its first home buyer scheme to guarantee 15 per cent of the deposit for first home buyers, meaning buyers could purchase a home worth $1.5 million in Sydney and $950,000 in Melbourne with as little as a 5 per cent deposit, without needing to take out lender’s mortgage insurance.

The Coalition’s also includes the home guarantee scheme (originally introduced by the Coalition and expanded by Labor), but then goes further by adding the tax deduction.

While the proposed policy has stricter guardrails than negative gearing (buyers must live in the property for five years, and only new builds will be eligible), analysis has already found it would provide double the benefit to high-income earners who could probably already afford a house without the tax write-off than it would to low-income earners.

Economist Steven Hamilton pointed out that a mortgage interest tax deduction is both “terrible policy” and “hugely regressive”, writing on social media: “The taxpayer is paying up to half of people’s mortgage interest! It’s a big demand subsidy, thus will push up prices. It blows a massive hole in the income tax base.”

Brendan Coates, the housing and economic security program director with the Grattan Institute, said on The Morning Edition podcast that no serious economist has called for such a policy, explaining the Coalition’s proposal is “basically a first home buyers grant on steroids focused on wealthier Australians who are likely to already buy a house.”

This policy also has a much higher mountain to climb than Labor’s when it comes to selling it to voters.

The term “negative gearing” is kryptonite to a decent portion of voters. Rightly or wrongly, to many, it is shorthand for a quality of life that older Australians will enjoy and the rest of us will never experience. For some, even the term elicits a visceral negative reaction and is seen as the root of the affordable housing problem. So it’s difficult to understand why the Coalition thinks rolling out a policy that can be easily compared to negative gearing will win people over.

But according to Coates, Labor’s policy isn’t all that much better.

“You could call this, in a sense, a pox on both your houses,” he said. “Again, we’re talking about boosting a policy that’s going to mainly help higher-income earners to buy a house who are going to buy anyway, because those lower-income earners that struggle to buy – and first home ownership rates are falling fast amongst younger poor Australians – they’re already eligible for the [Labor’s first home guarantee] scheme. So it’s not really going to shift the needle on home ownership, either.”

The bottom line is that both policies feed demand, which will push up property prices without meaningfully fixing the problem.

Rachel Clun is a former economics correspondent for The Age and The Sydney Morning Herald.

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