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in a nutshell:
The preferential tax treatment of housing investment, especially negative gearing in combination with capital gains tax concessions, has driven speculative over-investment in housing (which is in essence a non-productive asset).
As a consequence, these tax breaks have contributed to price rises above levels supported by economic fundamentals, increased inequality, discouraged investment in productive enterprise, and punished other traditional means of building wealth such as establishing businesses and saving money.
The enormous increase in mortgage debt accompanying the last two decades of housing speculation have placed our financial system at very large risk from a potential correction in values, exactly as it did in a number of other developed countries in the lead up to the GFC, who suffered economic devastation from collapsing house prices.
Perhaps even more importantly, exponential growth in mortgage lending has significantly cannibalised productive investment in other areas of the economy, as the availability of credit to business has decreased, and the general input costs of business have increased thanks to higher land values.
This process is best referred to as mis-allocation of capital, and among other problems, has resulted in lower productivity and competitiveness, and contributed to a massive restructuring away from a ?mixed economy?, not least of which has involved the alarming shrinkage of traditional labour-intensive business sectors like manufacturing and services.
Additionally, tax breaks flowing to superannuation and the ability to borrow money to invest in housing and equities in self managed super accounts has been identified as a key source of risk and a contributing factor to house price escalation. The report recommends securing in legislation the sole purpose of superannuation as providing for retirement, not speculation in housing or tax evasion.
Perhaps most worryingly, the report has effectively determined that contrary to popular belief, our banks do not hold adequate capital reserves against mortgage credit, and would be at risk of insolvency in the case of a major housing downturn.
Worse still, since the GFC, the precarious position of bank?s credit books have been backed by an implicit taxpayer-funded guarantee, helping to ensure that the required foreign credit to fund mortgage lending is available at cheap rates, despite the enormous profitability of major banks. And in the case of crisis, the taxpayer would again be on the hook for failing banks, a double whammy.
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