Housing bubbles…

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…?

 

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Tony Tea
6 years ago

Don’t know about bubbles, but Melbourne’s sales are currently going berserk. Are these increases based on the fundamentals (supply, demand, location x 3, etc) or is there something else at play? Is it something altered regulation would change? Is the current burst sustainable and soild?

Tony Tea
6 years ago

For instance, if you pay over a million dollars over reserve for a house quoted at 2 million, are you asking for trouble?

paul frijters
paul frijters
6 years ago

I suspect that the average superannuation savings of the first home buyers is very modest. The average age of the first home buyers is now 31 with average years of having an income, say, 7? How much superannuation would they have by then, 30,000?

Surely the policy pressure comes from the professional lobby groups, not the representatives of first home buyers.

conrad
conrad
6 years ago
Reply to  paul frijters

30K would go some way in helping people find enough money so they don’t have to pay extra mortgage insurance — This means that, after stamp duty, many could get under a 100%+ loan. If two people had 30K and and then had, say, saved 50k, they could probably get under the 90% level (and finally if they had more to the 80% level where you don’t have to pay the extra insurance cost).

GrueBleen
GrueBleen
6 years ago

I just don’t understand why people find it so incredibly difficult to grasp that ‘front loading’ the young with expenses and debts isn’t a really great idea. Consider it, even from the point of view of those who have attained a Uni degree:

1. they’re earning probably the least they’ll ever earn.
2. as soon as they do start to get a bit higher salary, they’re hit with their HEX debts
3 they need to have somewhere to live – sure, at home for a while, but what about when they get married. What’s so great about paying a house or flat lease and not even accumulating an eventual asset from it
4 when can they afford to have kids – and how much will it cost them when they do ?
5. And most likely they need to buy and run a car (each ?) unless they’re lucky enough to be able to live quite near decent public transport.
6. and on top of that, they have to pay superannuation which they don’t see any return on for at least 40 years.

Does this truly make any sense ?

conrad
conrad
6 years ago

If the purpose of superannuation is basically to force people to save for retirement and save the government money in the long term, then it seems an entirely self-defeating purpose to allow people to take it out for anything but the most extreme reasons. Given this, if people want to be able to spend their superannuation (and why force people just to spend it on housing — what about university fees, living fees whilst in education, childcare expenses, … and all the other things that might help you in your life that seem equally as valid), I don’t see any great point in having it at all, apart from as a tax dodge for richer people.

Thus, if it ends up as some strange saving scheme where you only get to spend your money on certain things and get a few tax benefits for doing so, I’d rather just see it scrapped and the money given back in higher wages, in which case people could save/spend it as they felt free.

conrad
conrad
6 years ago
Reply to  Bruce Bradbury

Why not just target things directly for the people of that age that need it, like for example, with child care subsidies? Or, like some places in the US, give a tax concession on first home buying and get rid of negative gearing for investors?

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
6 years ago

The basic micro-economic sense of allowing people to put their hard earned savings in the investments that make most for their stage of life (housing and education and childcare if you like) is unarguable. The cost of lenders’ mortgage insurance is a nice microcosm of the costs of doing otherwise. Still there’s nothing like the ‘hard option’ for the Very Serious People. No pain, no gain and all that.

If people say that that interferes with the task of saving for retirement, then we should walk and chew gum and address that issue at the same time – either by continuing to increase compulsory super contributions, or by allowing access to super on condition that increased contributions are committed to by the individual accessing their super (with my preference being the former, as the latter would end up being a concession accessed disproportionately by the wealthy).

There is a problem in all this of course which is that the super system is so concessional that cranking up contributions costs revenue – so we need to walk, chew gum and do something else as well! And we need to get an answer to the question of why, when we have chosen compulsion to increase household savings, we also use financial incentives to do so. I’d have thought the former vitiates the need for the latter.

john Walker
john Walker(@johnrwalker)
6 years ago
Reply to  Nicholas Gruen

Nicholas
Re increasing the supply of new housing , I came across a suggestion that seemed to me to be quite a good idea: reduce the tax concessions on investment in existing housing by 10% and at the same time increase the concessions on investment in new housing by 10%- would not cause too much in the way of problems for current landlords and therefore not push up rent rates, but would set a price signal, what do you think?

Franky
Franky
6 years ago

You are making things more complex. Unimproved land value tax: cuts speculation and land banking and encourages movement to where jobs are

Tony Tea
Tony Tea
6 years ago