I am writing to you as a constituent of your electorate, as a millennial, a voter, but primarily as a concerned citizen of Australia.
Having seen the most recent GDP figures, I thought it was about time that I put my thoughts down about my misgivings with regards to the cause of our stagnant growth and wealth inequality. As you and I are both aware (since you were the minister for housing in 2008), Australia has what is considered to be some of the most overpriced housing in the world. The reason that it is important is that mortgages account for 60% of all loans given in Australia, and the largest industry in our country at the moment involves property. It is important to note that prior to the GFC, the real seasonally adjusted housing price growth was faster in Australia than it was in the United States (according to data from the Bank for International Settlements), as we did everything in our power to continue to blow up the housing bubble that we both know exists in Australia. There are a myriad of factors that have lead to the housing bubble which include:
1. The re-introduction of negative gearing: Paul Keating removed negative gearing in 1986, and as a result, the rents in Sydney went up sharply. First of all, the fact that negative gearing was reinstated and hasn’t been touched since is an absolute travesty for people of my generation as it was one of the first contributing factors that added to housing price speculation. The primary reason that rents went up in Sydney were that people had paid too much for the property in the first place and their on-costs were passed on to renters, to say otherwise is naïve. It has lead to a generation of high-income earners not being taxed or significantly reducing their taxable income by reducing rents (ironically, Scott Morrison is the first to call my generation the “taxed-nots”). If negative gearing were to be only applied to new property it would substantially increase the volume of useful property stock, instead, the majority of properties that are purchased that use negative gearing are existing properties, which in fact reduces the number of houses that owner-occupiers can buy. This, in turn, means that the median price of housing goes up and the net effect of negative gearing on rents is, in fact, a rent rise long term or no change, instead, taxpayers pay for the speculation of property investors and first homebuyers are priced out of the market.
2. Capital gains tax concessions: In 2000, John Howard and his Liberal government in all its wisdom decided that it wasn’t enough that investors were able to claim their losses on property against their taxable income, they also needed to be given a tax break once they sold their property too. In essence, this was one of the worst perversions of policy settings in terms of the net effect on the property market. It meant that not only could high-income earners avoid tax by negative gearing, they could also sell the property after a certain period of time, pocket the profit and pay fewer capital gains costs than they would have had to if they had invested elsewhere. This law single-handedly shifted the housing price into orbit in comparison to the CPI, pushing home ownership ever further away from first homebuyers and redistributing wealth from the workers to the property investors.
3. Mortgage fraud in the form of systemic loan application form (LAF) manipulation: In a case study presented to the senate in late 2012, the BFCSA headed up by Denise Brailey provided substantial evidence that there had been systemic mortgage fraud perpetrated by finding discrepancies in a number of loan application forms and bank statements that proved the stated income to be false (I believe that Doug Cameron was present during this senate inquiry, as was Jim Murphy of the Treasury of the government in which you were a cabinet minister, Tanya). In many cases various assets such as stocks were made up and assets were invented or inflated in value. If this were an isolated incident, its effect on the economy would be negligible. The fact of the matter is that not only are cases like these common, they are internal bank policy used to ensure that the banks have cheap flows of credit available to them that they can loan out with higher interest rates so that their profit margins are bolstered. There was, in fact, a class action against Bankwest which seems to have been abandoned, however, there are a vast array of internal bank documents listed on the BFCSA website that show lenders and brokers actively encouraging mortgage fraud and their avoidance of insurance companies that wouldn’t comply with their fraud. Prior to the GFC, we had our own form of sub-prime mortgages known as low-doc loans, which still haven’t fully been exposed for what they are. Having a different name for a product that has the same function does not change the product, it merely obfuscates the truth from unsophisticated buyers and investors. It is the same as the difference between “the great recession” which is what the GFC is known by in the US. The language alone indicates that it was comparable there to the great depression, and the psychological impact that has is much more substantial than the “global financial crisis” since it treats the problem as being external without stating its impact on our own economy.
4. The correlation between household debt to GDP and growth in the Housing Price Index (Part 1): The household debt to GDP in 1988 was between 41% and 42%, whilst during the GFC it was 106%, so it had increased approximately 60% in 30 years, and was among the highest in the world during the GFC. As soon as it looked like we were going to go into the same type of heavy recession as the United States did and various parts of Europe did (especially Portugal, Spain and Ireland), we decided we’d try to keep the bubble blown up by introducing the first homebuyers grant, because what could possibly go wrong by introducing credit into the very same asset market class that caused the GFC in the US in the first place.
5. The first homebuyers grant: The first home buyers grant was introduced as an incentive for people to buy their own homes and a way to reduce the burden on people who were looking for somewhere to live, right? No. The net result of giving people more credit to buy property is that everyone else has the same amount of credit, so the price at auction then goes up by whatever the grant is and it is effectively voided. Again, there are only a select few people that benefit from this grant – real estate agents who pocket a percentage of the taxpayer-funded grant, mortgage brokers and banks who then are paid commission based on the sale price of the property which the grant helped to increase, and the seller who pockets whatever is left of the additional price paid due to existence of the grant. If you want to be realistic about why it was introduced, you must look at the effect that its introduction had on both the household debt to GDP as well as its effect on the housing price index.
6. The correlation between household debt to GDP and growth in the Housing Price Index (Part 2): Fast-forward to present day and Australia has become number one at something! It’s something we shouldn’t be number one in the world for – household debt to GDP. Since the introduction of the first-home-buyers grant and multiple interest rate cuts, we have now tied first with Switzerland as the country with the highest household debt to GDP at 125.2%, a further 19% in 8 years along the same path as we were going prior to the GFC. If you look at the housing price index from 2008 to now, you’ll see that it has doubled. The correlation between household debt and housing prices increasing is unmistakable because wage growth has been stagnant yet the housing price index has been growing at or above 10% annually! Where must the extra financing come from if it isn’t from wage increases? It is in smaller deposits and the costs are being pushed onto renters, which is not supposed to happen because negative gearing exists. Mossack Fonseca couldn’t dream up a tax avoidance scheme that didn’t involve offshoring like the combination of the first homebuyers grant, negative gearing and capital gains tax concessions. Looking at the most recent government figures released – our number one earner? Construction. What does that mean for the rest of the industries? It means that they aren’t generating as much profit as builders which in turn means that home buyers and investors aren’t earning as much as they are paying the property developers. Why has our household debt to GDP become the highest in the world? It is as a result of a lack of government funding for useful infrastructure. We do not have and will never have a state of the art NBN. We do not have a high-speed rail network or other means of fast public transport. We also have globally low-interest rates. It does not make sense to sit on the fence and not invest in infrastructure to help provide jobs that reduce the strain placed on sub-standard infrastructure that has not been updated and is in many instances well past its use-by date. We need to make realistic changes to the way we allocate our infrastructure spending since we have just approved the Adani mine in Townsville which is reliant on the price of coal, which as we have seen in Western Australia can result in high rates of unemployment because we haven’t been forward thinking and have been too reliant on the price of a commodity remaining stable.
7. Property investment seminars that make often fraudulent claims: I have on many occasions had to debate people from various property investment seminar pages on Facebook for advertising blatantly false and misleading statements about property financing whilst neglecting relationships between household debt and instability in economies (our household debt is higher than the historic maximums of Portugal, Spain, Greece, America and Iceland). At one stage I had to thoroughly debunk various claims from a conglomerate who call themselves “binvested” – one was that the investment seminar “MAP session” had helped people to invest in lots of “recession-proof property” using home equity. There is no such thing as recession-proof property or for that matter any recession-proof asset class. There is no single asset that is recession proof, regardless of how much you want it to be. It is also the case that these property investment seminars cost substantial amounts of money, and in the case of binvested all services in the investment process are performed by the same conglomerate (buying agents, lawyers, accountants, brokers and property investment advice are all provided by the same company with no second opinion).
8. The myth that Chinese investors will always want to buy: This is one of my particular favourite myths because it has no basis in reality. The Chinese Renminbi has performed particularly well against the AUD since 2012 as we have been progressively cutting our interest rates which further incentivised property speculation, now not just from Australians, but also foreign investors as well! In the case of the US, since the Renminbi has slid substantially in value against the USD, so too has the number of Chinese investors.
I shouldn’t have to write letters pointing out poor economic policies on both sides of parliament that allow banks to commit mortgage fraud and LVR manipulation. I will leverage my voice as a voter to point out the short fallings of all previous and present governments that have been complicit in this cover-up. There has been inadequate action against banks due to political inconvenience and I will not leave the economic future of this country up to chance because leaving it in the previous government’s hands (or for that matter in the hands of the woefully inept current government) would mean we bear the brunt of the consequences of moral hazard. If I sound like I am being critical it is because I am, since there is not one government that has made the right decision about property because it has been too politically inconvenient to do so. I will not suffer the consequences of self-interest quietly.
I would also like to point out quickly the insidious influence that investment banks have had on Australian politics by naming former employees of investment banks (not to mention their influence on global politics):
Ian Macfarlane – Former Governor of the Reserve Bank of Australia (1996-2006) (former Goldman Sachs executive)
Malcolm Turnbull – Prime Minister of Australia: 2015-present (former Chairman of Goldman Sachs Australia)
Mike Baird – Current Premier of NSW: (former executive of Deutsche Bank)
Bob Carr – Premier (1995–2005) of the Australian state of New South Wales current (former Macquarie Bank executive)
Max Moore-Wilton – former Secretary of the Australian Department of the Prime Minister and Cabinet to John Howard (former Macquarie Bank executive)
Graeme Samuel – chairman of the Australian Competition and Consumer Commission (2003–present) (former Macquarie Bank executive)
Warwick Smith – former Australian Federal Cabinet Minister (former Macquarie Bank executive)
Alan Stockdale – former Treasurer of the Australian state of Victoria (former Macquarie Bank executive)
I am sure there are names that I have missed. The point that I am trying to make is that banks will not self-regulate if the governing bodies that are supposed to regulate them are filled with former investment bank employees. I do not expect anything to change while banks are allowed to infiltrate government by putting up MPs that use the same trade practices in government as they did while working in investment banks – lying cheating and stealing to ensure that they get what they want at the expense of the Australian public. This truly is a matter of extreme urgency, as we have seen first-hand the consequences of inaction in countries such as Iceland, America, Spain, Ireland and Portugal are just to name a few. Whenever we introduce tough lending standards we have seen banks try and succeed in finding ways to circumvent the laws. When they haven’t been able to circumvent the laws they have just broken them outright. This will end in an extremely severe recession, or, more worryingly, a depression if it is not addressed.
I am both willing to listen to suggestions that you may have regarding solutions as well as offering a list of my own. I want to work with whoever I can to ensure that the issues that have been introduced into this economy are dealt with in such a way that we emerge from the necessary downturn as a stronger, more innovative and forward-thinking nation rather than one that pays lip service to it. I expect both a prompt written reply and a face to face meeting to see what it is you can do to represent the constituents of your electorate and to a greater extent the whole nation as they echo my sentiments.