The latest housing finance figures show that house prices are on track to continue to rise faster for at least another six months, while a speech by the treasurer suggests the government will shy away from touching negative gearing in the May budget.

On Tuesday Scott Morrison gave an address to the Australian Housing and Urban Research Institute. It was one of those speeches we get in the run-up to the budget where, in between telling us he doesn’t want to talk about what will or will not be in the budget, the treasurer tells us what will and will not be in the budget.

Coalition won't budge despite chance to tackle housing policy | Greg Jericho Read more

Rather aptly, as he spoke, the latest housing finance figures from the Bureau of Statistics came out. They showed a big drop in investor finance in February of 5.9%.

The size of the drop was rather unexpected, and suggest that the measures to limit investor lending by the Australian Prudential Regulation Authority have had an impact.

But given it is the second biggest monthly drop since the global financial crisis hit in 2008, it probably should be treated with a bit of caution. I’m not saying the measure is wrong, but it does tend bounce around a bit:

The annual growth of investor finance remains solid at 22% in trend terms. Investors continue to the be the big driver of overall housing finance growth, with owner occupiers up just 3.8%:

It means that new investor finance has stayed at nearly half of all housing finance – at 49.3%. Investors are clearly still in the market in a big way:

The housing finance growth in the past 12 months of 11.8% suggests that housing prices will also continue to grow at a faster rate. There is strong correlation between the annual growth of housing finance and the annual growth of house prices six months later. By that reckoning the current annual house price growth of 7.7% should continue to rise:

The treasurer emphatically ruled out any changes to negative gearing to temper investor lending on Monday.

His speech contained a continuation of the regular theme of specious reasons in favour of negative gearing that we have come to expect.

He told the audience that “regardless of one’s opinions of the merits or otherwise of negative gearing, it is an established and structural component of Australia’s housing markets. It exists.”

It certainly was good to have that cleared up.

He then argued that because it is an established part of our housing market that “disrupting negative gearing would not come without a cost, especially to renters, let alone the wider economic impacts. Proponents of disruptive negative gearing changes have ignored this fact.”

Actually those proponents have not ignored it. They have (myself included) noted that the impact of removing negative gearing on rental prices is massively over-egged.

We know this is the case because Morrison himself has demonstrated the fallacy of his own reasoning.

Just last week he suggested negative gearing was not a key problem because “you’ve got one set of circumstances over in Perth and to that matter in South Australia and Tasmania. I mean negative gearing and capital gains tax concessions exist there as well and property prices in Perth are going the other way or have been in the eastern states you’ve got a very different response”.

He’s quite right. Just because negative gearing exists does not mean prices will always rise in different cities at the same pace. Other factors are in play (such as weak economic conditions).

And yet Morrison – as did his predecessor Joe Hockey – also likes to suggests abolishing negative gearing will cause rents to rise because when it was briefly abolished in the 1980s, rental prices rose in Sydney and Perth, despite the fact they were flat elsewhere:

Thus for Morrison different house prices growth in different cities suggests negative gearing is not an issue, but different rental prices growth suggests it is.

Similarly Morrison continued to argue that negative gearing is mostly used by average income earners. He argued that “two thirds of those taxpayers who negatively gear their investments have a taxable income of $80,000 or less”.

That might be true, but of course it ignores that most of the benefit of negative gearing goes to higher income earners:

And crucially his argument ignores the fact that people use negative to gearing in order to reduce their taxable income below $80,000.

Oddly he also suggested negative gearing was needed to keep growing the stock of rental accommodation, and yet as the housing finance figures show, investors are more likely to purchase established properties. Just 8% of investor housing finance goes towards construction of new dwellings compared to 13% of owner-occupiers:

As Michael Pascoe noted on Twitter during the speech, Morrison was actually making “a strong case for limiting negative gearing to new & off-the-plan dwellings” (which is the ALP’s policy).

Rather oddly, Morrison also contrasted the situation in Australia where 27% of housing stock is owned by investors, with the UK, where just 18% is. He did this to argue this was a good thing because rents were cheaper in Australia than the UK.

The benefit of negative gearing must be quite pleasing to Sydney renters who have seen their rents in the past decade zoom beyond the growth of inflation:

The comparison with the UK also continues the very obtuse argument by the treasurer and prime minister that negative gearing is not an issue because the UK doesn’t have it and housing affordability is also poor there.

As Turnbull said last week “London is a good example where the negative gearing arrangements we have in Australia are not available” and yet “their housing prices are even less affordable than ours”.

It’s a bit like an athlete on steroids arguing his drugs didn’t help him because he came second to a clean athlete.

Is there a housing bubble or isn't there? | Greg Jericho Read more

No one is saying negative gearing is the only reason for housing unaffordability – the argument is that it makes it worse.

The treasurer’s speech, as expected, featured talk of social housing, supply issues and a focus on renters. Also as expected he completely squibbed the issue of negative gearing.

The one hope remains that the budget will see some reduction in the capital gains discount of 50%, but the treasurer’s speech does not bode well for the government doing anything to limit the boom of investors in the housing market.