Joe Hockey has received a lot of flack after his ‘thought bubble’ that first home buyers could be permitted to withdraw from their superannuation accounts to fund their home purchase. From the housing perspective, many have warned that faced with a fixed supply of housing, an increase in purchasing ability for first home buyers will just translate into a ‘first home sellers subsidy’. From the superannuation side, many, including Paul Keating and Malcom Turnbull, have protested that such a change would undermine the very concept of superannuation.
But I like Joe’s bubble – and would like to add one of my own.
The political pressure to provide support for young home buyers does not come from nowhere. As I have argued previously, there is plenty of evidence that people in the family (and household) formation stage of life are under more financial pressure than older households. Keating and Turnbull are correct when they say that Joe’s withdrawals will undermine the superannuation objective of financing old age consumption. But the broader objective of programs like superannuation is to shift resources across the lifecycle to the periods that most need them. While allowing draw-downs for first home purchase or even other costs such as child care might undermine the retirement saving objective of superannuation, it will make the program more ‘fit for purpose’ of within-lifecycle redistribution.
As for housing markets, any form of assistance to first home buyers is likely to have some impact on demand and hence on prices – at least in the short run. This is particularly the case if people move out of shared housing into their new home. (However, if they are already renting a similar house to the one they purchase, there is no net increase in housing demand). In the long run, this becomes less important as supply becomes be more elastic and demand from older investors is reduced (because they will have lower superannuation balances). However, it is true that we do face right now an apparent bubble in housing prices – a bubble that some suggest might be restraining the Reserve Bank from sufficiently boosting the remainder of the economy.
But let’s keep those thoughts bubbling! A key feature of an asset price bubble is that the main reason for investing is the expectation of future price increases rather than the intrinsic returns from the asset. The capital gains tax concession for investment housing introduced by the Howard government thus adds to the speculative ups (and downs) of the housing market. Only 50% of capital gains are counted as part of taxable income (at the time the asset is sold). When this concession was introduced, the relatively high inflationary expectations meant that this was not such a large concession (compared to the previous regime of taxing real gains). However, now that we are in an epoch of low inflation, this is a substantial tax concession.
So, why not make this concession percentage variable? Indeed, why not pass this over to the Reserve Bank as another policy lever to achieve its objective of (asset) price stability. Most straightforward would be to have just a single tax rate on residential real estate capital gains that applied to any property purchased at a given date. Upper and lower bounds (eg 20 and 40%) would be set by legislation, but the Reserve Bank allowed to vary the rate from time to time to maintain stability in the house price market.
Any more bubbles…?