Scott Morrison's response to Labor's negative gearing plan is truly disturbing

If nothing else, the release of Labor’s negative gearing policy last week has seriously spooked the government.

Gone is any sense of a rational adult debate of ideas. It took the prime minister less than a week to flick the hyperbole switch and declare the ALP plan will be virtual Armageddon for the housing market. Malcolm Turnbull didn’t quite suggest that the residential housing market would be wiped off the map à la the fate predicted for Whyalla under a carbon tax, but he went close.

He told reporters on Friday that “every homeowner in Australia has a lot to fear from Bill Shorten”.

Clearly the government has done the maths and decided that as 66% of households either have a mortgage or own their house outright, that it is far better to scare them than try to appeal to the smaller numbers of prospective home owners.

Turnbull’s belief that removing negative gearing will “smash the residential housing market” is one echoed with glee by the treasurer, Scott Morrision.

Both base their argument on the belief that removing negative gearing for established residences will mean – in Turnbull’s words – taking out “all of the investors. So there will only be home buyers, people who are buying it as a residence”.

As a consequence Turnbull and Morrison argue that house prices will fall.

It’s a pretty silly argument that doesn’t hold up under close examination. Even worse, it also suggests a pretty dismal assessment of the state of Australia’s housing market.

Are we to assume that the prime minister and the treasurer believe the value of Australian homes is reliant only on the ability of investors to use the system to avoid paying tax?

If so, that’s a pretty scary thought. It suggests that not only do the two top people in our government think the Australian housing market is some sort of tax-driven Ponzi scheme, but that they also want to make sure it stays that way.

The position of Turnbull and Morrison is – in the words the PM used to attack Shorten – “very blunt, is very crude, it’s totally political”.

For a start not all housing investors negative gear. Until John Howard introduced a 50% discount on capital gains tax in 1999 (which the ALP wants to reduce to 25%) about half of property investors negative geared, and half made profits from the rent they received.

Now about two-thirds of investors negative gear:

Turnbull suggests (correctly) that all investors account for about 30% of the market, but if we keep the third of current investors who don’t negative gear, we’re now down on his figures to only 20% of the market leaving.

Turnbull notes that for those selling their house “there are homebuyers, there are young homebuyers, there are older homebuyers. And there’s plenty of investors”.

But the “plenty of investors” is not the majority of buyers. You should not confuse reduced demand with no demand. And you should not confuse – or try to scare voters by suggesting it – that a lower growth of house prices means falling prices (let alone a smashing of them).

But even if we accept Turnbull’s story, it all gets a bit silly, because he only considers sellers and not buyers.

He tells the sad tale of someone trying to sell their house, but what about the buyers in his story? And why are the people selling their house? Most people sell their home in order to buy bigger one – so they would in turn benefit from the lower prices as well.

Turnbull’s horror story works best if you only care about people who have bought a house purely to sell it for a profit.

It would seem the government has gone from seeing only one side of the budget debate to now only observing one side of the housing market.

But at least the Turnbull’s argument was not as deluded as that put forward by his treasurer.

Morrison told ABC’s AM program last Thursday that the ALP’s policy was so bad that it would turn houses into cars.

He argued that, “for everyone else who owns property, the minute you put your key in the front door, your house turns from a new house to an old house, and it’s a bit like driving the new car off the lot in terms of what it means for your assets. So, I don’t think they’ve thought it through.”

Speaking of not thinking things through ... It’s almost enough to make you ring up Joe Hockey and tell him to come home; all is forgiven.

Morrison clearly thought it was a winning line because he used it again when talking to 3AW’s Neil Mitchell on Friday.

It is perhaps the most stupid line Morrison has uttered in his time as treasurer. In his eyes the real estate section will in the future contain “new” and “used” homes for sale.

Except houses are not at all like cars.

A car declines in value once it is driven off the lot because there is an almost infinite supply of new cars and a strong competition from suppliers.

If you want a new Toyota, you don’t need to pray that some investor doesn’t out bid you. All you have to do is go along to a dealer and buy it. The worst you will have to do is wait for them to bring in a car in the colour you want.

Even so-called “limited editions” are basically limited to as many as the dealer can sell.

Cars’ engines are finite – they don’t run forever, thus a newer car has greater value – and each year a new model comes out with better fuel efficiency, better handling, and updated styling. And because of almost unlimited supply and strong competition, that new model will mostly be the same price as was the previous year’s model.

So if you want to sell a 2014 Camry, the only thing you have to offer someone who wants to buy a 2016 model Camry is a lower price. It’s not like yours is the only Camry available to sell. And crucially it is not like yours is the only Camry for sale in the area.

Yes houses do get old, but they can be repaired, repainted, remodelled, or the garden can be landscaped.

Clearly, Morrison hasn’t watched many episodes of The Block.

Repainting a used car may improve its value over what you would have been able to sell it for, but it will never increase its value compared to what it was when you bought it.

A mere look at house prices compared to cars over the past 10 years shows just how different a market we’re talking:

The average price of a residential property is 77% higher now than in 2005, whereas the price of a car is 9% lower than then. And crucially that is the price of a new car, not of a car you bought in 2003 and now wish to sell.

And of course the overriding difference is when you buy a car, you don’t own the land upon which the car drives. Yes the state of the house is important, but you don’t need to have talked to too many real estate agents (or is that used-house sellers?) to know the importance of “location, location, location”.

Comparing the housing market to used cars is utterly stupid, and to do so repeatedly is almost enough to raise the question of whether Morrison is up to the job. It betrays an ignorance of supply and demand that would be laughable were it not coming from the man in charge of the nation’s finances.

Turnbull should leave the dopey fear campaigns to his predecessor, and Morrison should either learn the basics of economics or tell his boss to trade in his treasurer for a newer model.