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The ‘fair go’ has gone amid the cost of housing crisis and super perks for the wealthy

by Michael West | Jul 2, 2024 | Comment & Analysis, Latest Posts

The notion of a fair go is gone amid the cost of living crisis and the transfer of wealth from workers to wealthier Australians via tax breaks for property investors and superannuation perks. Michael West reports.

If they tell you, “Work hard, and you will be able to buy a home”, tell them they’re dreaming. Unless the dream is to move to the boondocks, the real trick for property ownership for younger Australians these days is to have rich parents, or marry well.

Such is the impact of rising inequality, a crisis which is the legacy of successive government policy failures. Such is the transfer of wealth from ordinary Australians to wealthy Australians and even foreign investors.

Something has got to give. No more tinkering around the edges. While Australians, particularly young Australians, are struggling through a severe cost of living crisis, new data has found that the government slotted property investors $85B in tax breaks during the past decade.

Worse, unless something is done about it, the cost of negative gearing and capital gains tax discounts will surge to $165B over the next decade. Higher interest rates mean bigger tax breaks for investors – and the bulk of these tax breaks end up with the highest income earners. We will get to that in a tick.

Yet something even worse is happening in terms of inequality. There is a large transfer of wealth from poorer to wealthier Australians via superannuation.

The bulk of super tax breaks and subsidies – some $40B annually – go also to wealthy retirees, not to pensioners or workers.

And these have been so generous over the years that the superannuation system is not only being used to fund the retirements of older Australians but also exploited as a giant tax shelter for wealthy Australians to pass on their tax free super to the children.

What this means is that, unless something significant is done in policy terms, inequality in this country will become far worse; it is likely to shred the social fabric. The notion of a ‘fair go’ is gone. This, particularly given interest rates have shot up from 0.85% to 4.35% in two years. 

Next move up is a downer

As super and wealth consultant Harry Chemay puts it: “Let’s, therefore, hope the next RBA rate move is down, not up. General mortgage rates at 7% would, as they note, “be as painful to borrowers today as rates of 17% were decades ago”.

We get to that in a moment.

Firstly to the latest estimates on this humongous transfer of wealth, a cost which every worker will have to bear over the coming years. This from the Parliamentary Budget Office as retold by The New Daily: 

The cost of negative gearing and capital gains discounts will balloon to $165 billion over the next decade, according to new data that’s sparked fresh fears for the next generation of home buyers.

Parliamentary Budget Office costings published on Monday show the federal government handed $85 billion in tax breaks to property investors over the decade between 2014-15 and 2023-24.

More than double that will be lost in forgone tax revenue over the decade to 2034-35 under existing negative gearing and CGT discounts, the analysis estimated, with 67 per cent of the benefits flowing to the top 20 per cent of the national income distribution.

By 2035, taxpayers will be losing $22.8 billion in revenue annually.

But we’ve just got our big tax breaks!

And so the revised Stage 3 tax breaks have just been handed down to some 13.6m taxpaying Australians. Surely that’s a good thing?

According to Harry Chemay, the current *median* household employment income (assuming a male at 100% FTE & a female at 60% FTE) is somewhere in the region of $143,000 gross per annum.

“I make that a rough uplift in median after-tax household income of ~$2,900 per year, or about $245 per month from today onward. But here’s the thing: take the average new owner-occupier mortgage (now >$600,000), assume a 30-year term and apply the current variable housing rate found on the RBA website.

“That’s a minimum mortgage payment of ~$3,715 per calendar month.

“By my calculation, there’s less than a 0.75% RBA cash rate rise before the benefit of the Stage 3 tax cuts would be offset by a greater mortgage servicing burden for the typical owner-occupier household.”

Herein lies the crux of the cost of living crisis for most of Australia’s recent mortgage holders, whether first home buyers, upgrades or refits. Most Australians that is who have not been in the market for quite some time.

“Cost of housing crisis”

So it is that we might, says Chemay, deem this crisis to be a ‘cost of housing crisis’ “insofar as owner-occupiers will do everything humanly possible to service their mortgage first and foremost, meaning that other household (i.e. discretionary) spending gets trimmed instead”.

Because of the dominance of housing (~$11 trillion market value & ~$2.9 trillion in long-term loans), we’ve massively increased the interest rate sensitivity of the Australian economy.

“Let’s, therefore, hope the next RBA rate move is down, not up. General mortgage rates at 7% would, as they note, “be as painful to borrowers today as rates of 17% were decades ago. That’s the power of leverage; but now working against, not for, mortgagors. And GDP growth.”

And that’s not the renters. They, too, are in a bind, or a ‘dystopian nightmare‘ as Harry has described it. The social impacts will be immense; the transfer of wealth from workers paying taxes to subsidise all the perks, and that’s without going to the very poorest Australians, those on meagre social security and the homeless.

What sort of a place do we want to live in? One where begging is a growth sector, one of haves and have-nots?

There are of course solutions, but what is lacking is political will to make them stick, as detailed in this video on money laundering reform, on which the government is still dithering after 17 years.

Songbirds and snakes. How to end the ‘Hunger Games’ of housing affordability

Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.

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