Cross posted from the Rational Radical
By Matt Ellis
Last week I had the opportunity to speak to Senator Nick Xenophon about our petition against his plans to allow first home buyers to use superannuation funds for housing deposits. It seems he had at least taken some small notice of the widespread criticism of such a dangerous policy proposal, and has perhaps even been influenced by the 700+ emails he received on behalf of the petitioners! So thank you to those who have signed the petition so far, and if you haven’t yet, please get on board.
We may well have made a very small difference in preventing this policy disaster, and importantly, perhaps even helped urge the Senator to take aim at some genuine housing reform targets, such as the preferential tax treatment of housing in this country, not least of which is current Negative Gearing arrangements.
In our discussion, Senator Xenophon acknowledged the strongly held concerns of myself and many experts, analysts, journalists and economists. Not surprisingly, at this stage he looks to be standing by his proposal, but he seems genuinely amenable to considering alternative views, and has not decided on the details at this stage. By the end of this year, he wants to announce a “package of measures” aimed at housing affordability, not least of which will be considering changes to negative gearing.
I reiterated our strong opposition to providing any artificial support to First Home Buyers, given that adding demand-side stimulus to the market has always led to price rises in the past. Many correctly argue that price rises are the express purpose of such grants. In fact, as Steve Keen has proven, over the last 50-60 years of housing policy, during periods where First Home Buyers had access to stimulus or grants, prices rose by a quarterly average of 2.18%, while the average price appreciation in periods without grants was a measly 0.26% per quarter… Case closed on that little stitch up, but something tells me we will have to continue fighting against these little sugar-hits for our teetering housing market, so favoured by Australian leadership.
I also expressed strong support for phasing out negative gearing, as well as a long list of other much needed reforms. It is very positive to see a federal politician finally raising the elephant in the room that is negative gearing, but we must also remember that there are many causes and potential solutions for unaffordable housing, and it’s not wise to scapegoat a single distortionary policy – but it certainly is a badge of honour for housing speculation, and a powerful symbol of inter-generational housing theft.
The best outcome from my discussion was Senator Nick Xenophon’s pledge to continue consulting with myself and others, and to not rush into any final policy announcements without taking our analysis on board. Being honourable but perhaps politically naive, I take the Senator on his word, but will indeed reserve judgement until I receive that phone call or email to discuss the next move.
Here is the summary of our discussion, and I will leave it to yourselves to draw conclusions, suffice to say that I appreciate the Senator taking time to hear our concerns, and for giving his permission to communicate our discussion to anyone who is interested. So please circulate this to any friends, family, analysts, journalists, economists etc. who have an interest in Australian housing reform, and who support genuine changes to the grossly inequitable and unbalanced circumstances that have been inflicted on the next generation of young people and their families.
- Senator Nick Xenophon proposed the idea for access to superannuation funds for first home buyers based on work done by the SA government statutory body HomeStart Finance, who presented the idea at the Senate Inquiry into Affordable Housing.
- The Senator expressed genuine concern for our failure to address housing affordability, and in particular to provide equitable access to accommodation for citizens in lower income brackets. He also expressed concern about the lack of quality infrastructure in new and outer urban developments, as these areas are some of the only affordable areas for lower income renters and home-owners, which itself is a source of inequality.
- He stated that any legislation in the area of superannuation would be a very gradual and careful set of measures that would seek to protect first home buyers and their retirement savings from risk.
- The Senator plans to announce a suite of policy measures aimed at addressing housing affordability, believing that there is no single solution.
- The Senator will not be rushing ahead with any plans, but is consulting widely with experts, stakeholders and the public. He aims to announce the “package” of measures by the end of the year.
- The Senator has already consulted with the superannuation industry, who have expressed concerns about the proposal, which I assume is due to perceived risks to retirement savings, and the withdrawal of funds from their investments.
- I reiterated to Senator Xenophon our concerns about this proposal driving further price rises and worsening affordability, as well as putting the retirement savings of first home buyers at significant risk. I also stated strong support for his later suggestion to phase out negative gearing, and address the inequitable tax treatment of housing.
- At this stage Senator Xenophon stands by his proposal for access to superannuation for first home buyers, but has not explored all potential details, and is open to further advice on the subject. (And we of course hope he is open to changing his mind upon weighing of the actual evidence!)
- The Senator is supportive of changes to negative gearing legislation, and would favour a “grandfathering” type arrangement to phase out the tax break so as not to penalise or destabilise existing arrangements.
- He would also prefer to “tweak” arrangements so that negative gearing may be still available for investments in new housing, in particular investment in new builds for low income affordable housing, though he is yet to decide on the form of these potential changes.
- The Senator pledged to keep us in the loop on further developments, and to consult with us before making any final announcements.
- The Senator seemed genuinely surprised by the level of opposition expressed in the media about the idea, and emphasised that his motivations are genuine with respect to addressing housing affordability in Australia.
Given the limited time to discuss the matter further, I forwarded some follow up questions to the Senator, which I will advise on once I receive responses:
- The Finance Minister Mathias Cormann has recently ruled out any government support for access to super funds for first home buyers. How do you propose to secure passage of this legislation without the support of the government? Have any other parties indicated support for such a policy?
- How do you respond to Garth Turner’s criticisms of this policy idea, given his involvement in the passage of similar legislation in Canada, which he regrets owing to its contribution to sustained price rises and falling housing affordability in Canada?
- What happens to the superannuation repayments if property values fall over the medium or long term and buyers end up in negative equity, or worse, foreclosure? The RBA and a lot of economists are warning that this is a distinct possibility. The RBA has even recently warned first time buyers to avoid entering the current market, expecting at least a minor correction at some stage.
- Can you provide any more detail on your support for the phasing out of negative gearing? There is broad and growing support for changes to this policy, particularly amongst the younger generation of voters, and a “grandfathering” approach that prevents new arrangements would avoid a backlash from existing recipients.
- What is your time-frame for further announcements about affordable housing policy?
- Do you have a sense of the potential outcomes from the affordable housing senate enquiry? Do you intend to utilise the findings of this enquiry to inform your policy choices with respect to affordable housing, and do you have any idea how the major parties and other political camps will act on recommendations?
Explaining to Senator Nick Xenophon How Bad this Policy Idea is…
Lastly, as follow up to the conversation, and given our somewhat limited time to discuss the issue, I wanted to pass on to Senator Nick Xenophon a more detailed explanation of our concerns, especially given all the recent developments in media, political and regulatory circles with respect to housing. I really wanted to spell out the full basis of our opposition to super funds for housing, and our support for changes to policies like negative gearing:
- Giving first time home buyers access to additional funds (and therefore greater capacity to borrow), historically has always resulted in accelerated increases in house prices, as economist Steve Keen has proven in his work on First Home Owner Grants. Steve Keen showed in his long term 60+ year analysis of first home owner grants, that during periods of grant availability, real house prices rose by an average of 2.18% per quarter, compared with 0.26% per quarter in periods with no grants available.
These are facts on the ground. If we acknowledge that the key long term barrier to home ownership is record house prices (when compared to incomes and rents), then we must admit this proposal has the potential to do more harm than good to first home buyers, as all similar policies have done in the past:
Table 1: The First Home Vendors Grant and quarterly change in inflation-adjusted Australian house prices since 1951
Figure 1: The FHVG, Australian real house prices, and unemployment
Source: Built on the backs of first home buyers | Business Spectator
- Like many respected economists, the RBA governor Glenn Stevens recently agreed with this perspective, stating that: “…we can’t improve housing affordability simply by adding to demand. Targeted assistance can certainly help particular groups such as first home buyers, but without a supply-side response, any generalised increase in demand will just be capitalised into prices”. Further direct assistance to FHBs would be in disagreement with the conservative and sober assessments of the Reserve Bank of Australia: RBA: Speech-Opening remarks – Inquiry into Affordable Housing
- Therefore, the reverse is also true – and the evidence shows – that the best way to improve affordability is to remove all sources of excess demand, particularly for existing housing stock, and of course, by not adding any further artificial demand to the market. The biggest source of excess demand is the preferential tax treatment of housing “investment”, in particular the grossly inequitable and distortionary policies such as negative gearing and capital gains tax concessions.
It would also be a good idea to restrict the ability of Self Managed Super Funds to make leveraged investment in residential housing, and to support tighter enforcement of existing laws on foreign ownership of established housing, as proposed by the review into the FIRB.
- A further key reform to ensure equal access to housing would be to replace inefficient and punitive stamp duties with a broad based land value tax. This would help reduce speculative land banking practices, ensure efficient use of existing housing stock, encourage re-development of “brownfield” sites, penalise speculative rental vacancies, and best of all would help fund the provision of infrastructure by capturing some of the value of improved land amenity.
Federal Labor have recently announced a similar plan for “property taxes”, but a tax on the unimproved value of land, as supported in every tax review in living memory, would be a boon for social equity, affordable housing, and the economy as a whole: Shortage-sceptic Prosper Australia shocks Senate committee | Prosper Australia
- Any concerns about “distorting the market” by addressing sources of excess demand don’t hold water, as by definition the market is already distorted by this preferential tax treatment. As Senator Nick Xenophon himself stated in his letter to Tony Abbott, “It’s crazy to have a blanket tax code that rewards debt over equity”. Our current tax system is itself the biggest distortion in the market, and needs to be corrected.
Any additional funds made available for housing will simply increase this distortion. Cooling excess demand and allowing the economy and incomes to catch up with house prices is the best way to help first home buyers.
- By way of comparison, the First Home Saver Account, the only government intervention that rewarded first home buyers for actually building equity instead of taking on debt, was scrapped in the last budget without any ceremony or media fuss. Why encourage FHBs to take on even larger amounts of debt, when very inexpensive ideas like the First Home Saver are scrapped without a peep from politicians and media?
- The Canadian Home Buyers Plan has seen 47% of savers failing to pay back the accessed funds in the allowed time frame, mostly because it allowed them to borrow much more than they otherwise could afford. For example, an extra $20,000 for a deposit would enable an extra $80,000 of borrowing using a 20% LVR. These savers now receive large tax bills to pay back the funds, and their retirement savings are deeply compromised.
A similar policy in Australia would likely have the twin effects of increasing house prices, and compromising the stability and integrity of Australia’s retirement system. No kidding — Greater Fool – Authored by Garth Turner – The Troubled Future of Real Estate
- As the Senator would be aware, the Australian Superannuation system has a “Sole Purpose Test” contained in its enabling legislation, meaning that it is for the sole purpose of providing stable retirement income for the recipient, and insurance for exceptional circumstances. It specifically “prohibits the use of concessionally taxed superannuation savings for purposes such as providing pre-retirement benefits to members”.
Therefore, this proposal goes against the very reason for the existence of superannuation, and would in turn compromise its objectives. Even where funds were paid back in full, the member would be missing out on years of compound investment returns.
- There have been increasing warnings lately about the stability of the housing market in general, and the RBA and a growing chorus of top international agencies, economists, bankers, analysts and experts have warned that house prices are not sustainable at their current levels. The RBA governor has repeatedly warned that house prices do not always go up, and may indeed face a large correction at some point.
The RBA has even warned first home buyers several times to hold off on entering the market at this stage. As Lucy Ellis stated: “As experience overseas has shown, you do nobody a favour by trying to solve an affordability issue by making it easier for people to borrow more than they can reasonably service.” RBA: Speech-Space and Stability: Some Reflections on the Housing–Finance System
- Further, the RBA are in the process of introducing controls on speculative housing credit to cool an “overheated market”. If we encourage first home buyers to enter this very risky market, we may be condemning them to negative equity and lost retirement funds that have no hope of being paid back. In considering the merits and risks of Senator Nick Xenophon’s proposed legislation, we must consider the worst and even likely case scenario of falling house values.
- This is the essential reason that I, a potential first home buyer, have opted out of the housing market. It’s not because I don’t have enough of a deposit to “get a foot in the door”, it’s because I view our record prices as an unacceptable risk to my future income and livelihood, given the long history of warnings and analysis of the self-evident risks inherent in such high land values. I consider that to be the reason that I am “locked out”. With prices in Melbourne and Sydney some 8 – 10 times incomes, compared with historical levels of 3 – 4 times income, why do we automatically consider it a good idea to inflict decades of mortgage stress and risk on young Australians?
If I thought for a moment that getting access to my superannuation would help me as a first home buyer, wouldn’t I go for it? No, because like more and more first home buyers, I’ve done my research, and can see the real causes and solutions for unaffordable housing, and the very real risks in the present market. We don’t want any more money waved at us, we want land owners to pay their fair share of tax.
- Finally, at the very least, given the RBA’s increasingly stark warnings, surely it is prudent to wait and see the results of proposed macro-prudential intervention before moving to pump more money into an overheated market, which would work in opposition to the reserve bank’s intentions. Rather, in order to capitalise on Senator Nick Xenophon’s willingness in the area, let us turn our attention to that holiest of sacred cows: Negative Gearing.
I will be looking forward Senator Nick Xenophon’s response, as well as updates on the progress of policy proposals in this area. I appreciate the Senator responding to our petition and his pledge to keep us in the loop with developments, and I’ve offered whatever assistance I can give in formulating genuine reform.
I believe I speak for the petition signatories when I say that we want to support the Senator in his pledge to address housing affordability, and there is a large and dedicated community of analysts, economists, experts and journalists who will wholeheartedly get behind any genuine attempts to reform housing in Australia. Just make it the right reforms this time, for goodness sake.
Image – Govt Oversight