Australia could take the heat out of the housing market and make home prices more affordable by cutting negative gearing and capital gains tax concessions, the head of Australia's Reserve Bank sad.
Reserve Bank Governor Philip Lowe also questioned the wisdom of a global race to the bottom on corporate tax cuts, Government's claims that the central bank backed its view that cutting the corporate tax would create "jobs and growth".
In a remarkably frank exchange before a Standing Committee on Economics, Dr. Lowe said replacing negative gearing and the capital gains tax would take some heat out of the housing market, at least in the short term.
While he said negative gearing alone wasn't the issue, it was the combination with capital gains tax discounts that charged investment demand.
While he couldn't quantify the effects, if removed, it would likely help housing affordability.
It's likely it would reduce investment demand for a while, you'd have lower prices and that would take the heat off the housing market.
Negative gearing is a tax benefit that allows investors to offset losses on their rental property against their income.
Dr. Lowe highlighted that Reserve bank is in a difficult position. cutting rates could further fuel real estate prices while raising rates could threaten highly indebted households. Is it in the national interest to create vulnerabilities in household finances? he asked the committee. He noted that it would be better if unemployment was a bit lower, inflation a bit higher.
Debt is still rising faster than income, spurred on by record low-interest rates and low borrowing costs. Australian household debt to income reached a level of 177 percent in 2016, according to Prime Capital. There is a form of international tax competition going on, and in the post-crisis environment, lowering corporate tax rate as a potential strategic advantage to attract investment elsewhere around the world.
I think you could argue that this is from a global perspective it's not actually that useful," Dr. Lowe said.
Dr. Lowe said Parliament would have to make a choice between responding to international tax competition or say no, confident that the country has other advantages that attract investment.
The Reserve Bank expects the Australian economy should grow by around 3 percent in 2017 and 2018, with LNG production expected to add 0.5 percent to GDP growth.