Pure genius

We hear a lot about the two-speed economy.  I've seen plenty of it in my time -- the reality is that some have always had more than others, and are mightily reluctant to share the bounty.

It's interesting to see that some mining executives are trying to come up with ideas to ameliorate the distortion their industry brings to the national economy.  One of their headline responses is to tax owner-occupied homes.

Now, there can be no doubt that mining and anything to do with housing are the two most protected industries in this country right now.  There's not much that can be done about mining, unless the companies decide to ask a lower price for their product.

Housing, however, is a different matter.  Anyone with a tenancy can see how privileged speculation on the housing bubble has become.  If you have any communication with real estate agents it becomes uncomfortably clear: compared to a decade ago, they have become downright rude in their dealings with the routine business of tenancies.

The reality is that a couple of government policies have brought a major distortion into the housing market.  One of these is the first home owners grant, which was aimed at people buying newly-built housing stock, but the more serious problem really comes from negative gearing.  How many mum and dad investors are out there with a couple of investment properties -- undoubtedly bought at the expense of affordability for the kids?

There is a better way to address the tax gap on housing stock.  Let owner-occupied property continue under the present regime -- after all, having a roof over one's head is a fundamental right -- but get rid of negative gearing.  The price of housing is one of the major factors driving inflation, and the major fiscal policy response is for the Reserve Bank to raise the money rate.  They only have one effective tool to deal with inflation, but the market for housing remains febrile, particularly in the inner-city.

Of course, anyone with any stake in the current dynamics of the housing market will scream blue murder.  But it cannot be denied that the present structure of the market is warped.  If there is to be a bursting of the bubble, it would be better if it came through a staged process of redrawing the tax policy on negative gearing.  The point of the exercise should be to deflate the value of housing in order to support future affordability.

The problem is that the market has a habit of correcting itself, often with catastrophic results.

It may be that what could have been achieved by regulation may well happen by default.

In the meantime, we have mining executives brainstorming policy that leaves them well alone.