Craig Reucassel:
Well, the Budget debate continues. Some suggested in the newspapers this morning that the government might be willing to make some changes in the Budget, particularly when it comes to the so called the death tax, the testamentary trusts, the discretionary testamentary trusts. Yeah. So, let’s get the latest on this with Dr Daniel Mulino, who is the Assistant Treasurer and Member for Fraser. Morning, Assistant Treasurer.
Daniel Mulino:
Thanks very much for having me on, Craig.
Reucassel:
Now, your background’s in economics, right. So, you’ve done a master’s, you’ve got a PhD in economics. So, I want to kind of talk through what the impacts of this Budget are going to be and I guess what you expect the impacts are going to be. So, we just heard, we’ve just been speaking to the minister, Rose Jackson, talking about the housing crisis and the increase in homelessness. Are you predicting these changes are going to help solve that problem?
Mulino:
It will be an important part of the solution. And can I just take a step back and say that we have had our eyes focused on increasing supply for the past 4 years and that remains a key focus and the work of Clare O’Neil will continue in that vein, where we’re investing tens of billions of dollars to build new houses. Working with the states, there’s 2 billion in this Budget to unlock an extra 65,000 homes.
But we also know that the tax system is not helping and the interaction between negative gearing and capital gains tax has contributed to house prices outstripping wages growth over the last few decades. This is a well established problem and that’s making it much harder for young people to get into the market. The modelling from Treasury suggests that over the medium term, as a result of this tax package and Budget in its entirety, around 75,000 houses will shift in the market from being investor owned to owner‑occupied. So, that’s 75,000 individuals or families that will move from renting to owning their own home. And that’s a big change.
Reucassel:
And that’s a positive step. And I want to talk to you about this from a Sydney perspective at the moment and just in terms of what impact is going to have, because also the kind of modelling suggested that housing prices wouldn’t go down. We’ve seen some analysts are now saying there will be a major property price drop and there’s big questions about what impact that will have overall.
So, let’s look at it in terms of Sydney. You say there’s 75,000 more people will get into home homes. Let’s look at removing negative gearing and capital gains tax from older properties. From non‑new properties. Okay, so you now go to an auction for an older property to say an older apartment is put up for sale. Investors are unlikely to be there. So, from a first homeowner’s perspective they’re going to be great. I’m not getting gazumped by an investor so they’re going to like that. But those first‑homeowner bonus this 75,000 are not going to replace the whole market that’s put there by investors. Does that mean we’re going to see a drop in the market for houses that aren’t new?
Mulino:
The modelling from Treasury is that because of the nature of the overall package, which includes grandfathering all existing people who are negatively gearing, the overall effect of the package is that it’s likely to see house prices moderate by around 2 per cent for a couple of years. And so that means if they were going to grow by 5 per cent, they’ll probably grow by about 3 per cent. Now of course that’s going to vary a lot by market and even within a market like Sydney, it’s a huge market and price growth varies in any given year across different parts of Sydney. But the modelling suggests that it’s going to see a slight moderation in house price growth –
Reucassel:
Forgive me if I question the Treasury modelling though it’s interesting because, and maybe the timing of these changes is not great from a political perspective for you because we’ve already seen the housing market’s been contracting. We’ve already seen in some areas prices going backwards already because of, not necessary, because of government, because of the war in Iran and because of inflation impacting that and then the Reserve Bank putting up interest rates. But you now add this on top. If somebody’s going to sell an old property that was negative for gearing, they can’t pass that negative gearing on to somebody else. Isn’t it going to mean that that whole secondary market is likely to fall substantially?
Mulino:
Well, I think we need to also take a step back here and look at the fact that what we’re trying to address really long term and medium term systemic problems in the housing market, that if you go back 20 years, housing prices have increased –
Reucassel:
I totally agree with that, just, I totally agree with that. We’re trying to fix that. And I guess what I’m trying to get from you to understand this is that is the government happy if house prices go back? It’s not a huge amount by 4 or 5 per cent or whatever. Is the federal government happy with that? Because it is part of fixing the intergenerational problem that you’ve identified?
Mulino:
Well, I think as you’ve identified, this won’t be the only thing affecting house prices. The housing market is a big, complicated market which is affected by a number of economic factors at the same time. And really what the Treasury modelling is trying to do is to isolate what’s the additional impact of these policies. And so as you move forward, as these policies are implemented, they will see a moderation of 2 per cent for a couple of years on top of whatever else is happening in the market. Look, it’s difficult to predict –
Reucassel:
It is difficult to predict, but I want you, because you literally, you’ve got a masters and a PhD in economics and I think to just go back to basics here. Currently, a lot of rental places have a very low yield, maybe 2 per cent, 3 per cent. So, it’s an incredibly bad investment at the moment. People have essentially invested in that for 2 reasons. A, they’ve had negative gearing and capital gains discounts and B, they’ve expected the market’s going to continue going up forever. Now, these changes have a big impact on that and I’m not judging whether they’re good or bad, by the way, but I’m saying those changes definitely have a huge impact on that. Doesn’t that mean necessarily either rents will have to go up or prices will have to go down to even up that scenario?
Mulino:
Yeah, And I think the expectation is that there will be a moderation in house prices. And look, Treasury’s modelling suggests 2 per cent, so that’s, that’s a –
Reucassel:
I love the Treasury modelling.
Mulino:
Well, I mean, I think this, These are –
Reucassel:
Treasury modelling is often wrong, isn’t it, Daniel? Let’s be honest.
Mulino:
Well, look, I think they say that, you know, no model in economics is exactly 100 per cent right all the time, but there are models that are useful. And look, I think you need the modelling to try and design policy as best you can. And look, Treasury modelling has a history of being about as good as any analysis. It’s got a pretty strong track record.
Reucassel:
And yeah, let’s, let’s move on from that. Let’s move on from that then. Just there is a report in today’s paper in the Sydney Morning Herald suggesting that the Anthony Albanese may be open to changes on what the coalition has described as a death tax, which is the, where a discretionary testamentary trusts are impacted by the changes to the trust rules. Is that being looked at?
Mulino:
So, I think we’ve got to clarify that when it comes to the way that the vast majority of people pass on assets so through deceased estates and bequests. That’s not being affected at all –
Reucassel:
Oh, no. This is less than 10,000 people. We know that, but are you looking at changing it?
Mulino:
No, no. So, I think basically what we’ve got in our tax package is that bequests won’t change. Fixed trusts can be used. Arrangements for orphans and vulnerable children won’t be affected in disability trusts. So, what we’re saying is when it comes to discretionary trusts, we’re trying to better align the taxation, those arrangements with taxes earned from labour. And so that’s a core part of our package, and that’s a very important part of our tax system, which a number of major reviews over decades have said needs to be addressed.
Reucassel:
Okay. And just funny on the text line, John from Tempe says ‘my Tempe house has gone from $300,000 in 2006 to $1.3 million. Whether it drops by 5 per cent is inconsequential’ says John. And I guess. I guess that’s why I’m asking. I guess I was just asking if you guys. Are you ready for, are you prepared for, are you going to own a drop in prices and say that that’s part of the purpose of it or not?
Mulino:
Well, and I think what we’re saying is that, you know, the Treasury. I keep going back to the Treasury modelling, but it is saying that prices will moderate by a couple of per cent. And the thing is, we’ve got to look at that in the context of prices being affected by other things, but we’re trying to isolate the impact of this policy. And, yes, it will moderate a bit, and that is part of the design, and it’s in the context where prices have gone up so much over 20 years relative to income. So, that is an important part of what we’re trying to do to help young people get into the housing market.
Reucassel:
Yeah, we’ll see the impact of that. Thanks for speaking to us this morning. Appreciate it, Daniel.
Mulino:
Thanks very much, Craig.