It has been a tough week for Mr Morrison and his Merry Men in the Negative Gearing Defense League (NGDL).

The ALP announced a policy of modest negative gearing reforms on the weekend and have been promoting it around the nation with a disturbing degree of vigor and coherence that is proving most upsetting to the members of the NGDL.

To make matters worse a bunch of folk including Macrobusiness and Breakfast TV have been piling on and pointing out that Australia can no longer afford the extravagance of driving a bubble in household debt by offering a cocktail of excessive taxation advantages for those lucky enough to be considered “credit worthy” and thus able to leverage up with debt and bet heavily on “bricks”.

The problem is that Mr Morrison would sooner poke himself in the eye with a burnt stick  than be told what to do by the likes of the ALP and the Greens (who were the first off the blocks last year with policies to reform negative gearing rules) and the growing cheer squad of economists and other clear thinking individuals across the nation.

As he keeps telling us

“This boofy bloke is not for turning” (note – not actual quote).

Note:    The Negative Gearing Defense League includes the public minded folk at the Master Builders, Housing Industry Association, the Property Council of Australia (Mr Morrison’s former employer) and an assortment of debt peddlers in the banking, finance and real estate sectors and their pet economists and sympathetic op-ed writers.

So what is to be done?

What Mr Morrison needs is an alternative policy that addresses the problem of a nation that is  rendering itself economically impotent with record levels of household debt (and the foreign debt that supports the household debt) and internationally bloated land prices but allows him to deliver a win to his pals in the NDFL.

He needs an alternative policy to promote as an even better solution than reform of the existing policies concerning negative gearing and capital gains tax discounts.

Fortunately, the wonderful news that the Glass Pyramid is able to deliver to Mr Morrison and the NGDL, is that the answer is right in front of them and on the tips of their delicate moist lips.

SUPPLY SUPPLY SUPPLY !

Members of the NGDL and Mr Morrison have been trying all week to ward off the progressive pitchforks by clicking their ruby slippers and muttering the words

“the answer is supply, the answer is supply” ….. clickety click, clickety click.

But no magic is happening.

Unfortunately this ritualistic chant is not working because they have not explained how supply could be an effective alternative to reform of the negative gearing rules.

This is where the formidable Glass Pyramid policy research unit under the supervision of the Head of Research comes in.

The Supply Problem

For several decades most if not all Australian housing markets have developed incredibly expensive and inefficient systems for delivering land to the Australian housing market. New blocks of serviced land are being delivered to market for many hundreds of thousands of dollars instead of tens of thousands of dollars.

It is not unusual to see new blocks of newly serviced farm land (without a house) in Sydney 50+km from the city being advertised for $500K or more. Other cities are less costly but still overpriced.

There are a range of reasons for these sky high costs including,

• the “first user pays all” approach whereby most of the costs of development and providing municipal services to the land are dumped on the first purchaser,
• gold plating of servicing standards by local authorities who want the first user to pay through the nose to save the council maintenance costs over the following decades.
• GST on new home sales

One of the consequences of driving up the price of newly serviced land is that these much higher “base” prices support higher prices right across the housing market.

However the most important consequence of pumping up the price of new land and housing  is that it limits the supply of new housing because the price is so high and the number of households who are “credit worthy” or willing to take on $300-500K of debt is limited.  Instead of young families getting hitched and buying their first home they are hanging around mum and dad’s place trying to save a mammoth deposit.

High prices and a lack of supply are the rich fertiliser that feeds the negative gearing speculation crop.   Limited and expensive new land supply super charges the potential of negative gearing.

Bad negative gearing and CGT discount policy is still a problem but denied of its constipated land supply oxygen it will shrivel and remain puny.

The Supply Solution

Fixing the supply solution is easy but it will require deliberate and focused policy by a government committed to action.  With the determined Mr Morrison in charge and his band of Merry Men supporting him “all the way” fixing the problem should be a doddle.

The key is creating a system whereby new land can be delivered to market at much lower cost to the first user and introduces a competitive approach that reduces the tendency for a range of players to pump up the costs to the first buyer – who is often a first home buyer or lower income working family.

The simplest approach is for the Federal Government to step in and make things happen.

Forever cowering behind the incompetence of the State governments is no answer plus the single most powerful driver of demand for new land for housing is the rate of migration which is completely within the control of the Federal Government.

If the Federal Government and business wants to drive a Big Australia policy they must take responsibility, at the very least, for ensuring a supply of low cost land to house that Big Australia.  (state governments should clap at this point)

STEP 1                A new Federal “Land Development and Servicing” Fund

The principle of the fund is simple.

Each year the Federal Government will make a limited fund of money available on a first comes, first serves basis to developers and state/local governments.    The grants from the fund will be used to pay for the development and servicing costs of bringing new land to market.

Recipients of the grants will be given 18 months to bring land to market or they will forfeit the land to the Federal Government who will auction the land off and recover the amount of the grant.

There is no requirement that developers or State/Local Government apply for the grants but having the Federal Government pick up the tab for the development costs should prove very very attractive to developers and state land development authorities.

Flights to Canberra will be booked out in the rush to grab some Federal cash and newly serviced low cost land will be auctioned off to new home buyers across the nation.

Within a few years we will again be a nation where young families who save a modest deposit can be in a home of their own without a mortgage that requires both parents to work full time for 20 years while raising a young family.

STEP 2             Who pays?

This is the critical part as we know there is nooooooooooo way that the tight fisted Mr Morrison will want to be left to pay the bills associated with serving the land required by young low income working families – even if many of them are now Howard Battlers and vote for the LNP.

He is no Whitlam.

To pay for it the best option is to require the States – as a condition to any land in the state receiving grants from the fund – to introduce the Municipal Utility Bond model.

The Municipal Utility Bond model has been used in the United States for years and it would not be difficult for Scott to provide the necessary ‘incentives’ (aka fund money)  to get the state governments to introduce the necessary laws and regulations to allow repayments of the Federal fund money to be secured as a first charge against the title to the land serviced with the money raised by the bonds.

This would allow all the development and servicing costs associated with bringing new land to market to repaid over 30 years (or longer) by the new home owners in the form of a quarterly charge.

Instead of being forced to take out a mega mortgage for many hundreds of thousands of dollars to pay for development and servicing costs, the new home buyer (or subsequent owners of the property) can pay them off over 30 years.

Instant release from debt stress for thousands of young families and who will they thank?  You Mr Morrison – just think of all that love heading your way.  It might be enough to get you on the road to the lodge.

By linking the actual payments made by a specific property owner to the funds expended on the property or development, a competitive element will be introduced as developers and state and local governments will know that “gold plating” or bloating the development costs will drive up the quarterly payment and thus make their development less attractive compared to the development produced by a more efficient developer.

Step 3              Calling all investors

Even though many would say that the Federal Government should be extremely happy to have a steady stream of income rolling in from all those householders paying their quarterly charges for the next 30 years, it is likely that Mr Morrison will want to sell off that income stream and pay off the development funds expended each year as quickly as possible.

Selling off a juicy income stream that is protected by a first charge against the property title is like shooting fish in a barrel so we will not waste time explaining how to do it beyond noting such a secure investment would be ideal for SMSF and certainly better than encouraging them to lever up and take a punt on an investment unit in Docklands.

The BAD NEWS

How can there be any bad news?

Well there is a small problem.

The main reason is that the NGDL and their former colleague Mr Morrison (and other pollies) are not really serious about fixing the problem of bloated house prices and the mountains of household debt that are needed to support those prices.

They all (especially government) make a living from taking a slice of that growing private debt mountain and any policy that is likely to make the supply of housing efficient and low cost is likely to fundamentally undermine their way of making fat bonuses, clocking up surpluses and juicy profits.

You see – they simply love encouraging (and denying an alternative) to the majority of Australians rich and poor being in hock up to their eyeballs.

The REALLY GOOD NEWS

There is of course some really good news.

If the ALP and the Greens and the independents really want to make Mr Morrison’s week turn out badly they will adopt the Federal Land Development and Servicing Fund model and deny him his last refuge – the claim that the problem is not about negative gearing but is really about supply.

The combination of policies to reform negative gearing and land supply constipation applied to Mr Morrison and the NGDL will be like a running down a vampire in a truck filled with garlic.