Housing: The truth about raiding super and exempting stamp duty

Economist Saul Eslake has joined other commentators warning the federal and state government that some of the ideas flagged to improve housing affordability are likely to have the opposite effect.

Among the notions floating Canberra’s way and around to state governments are allowing first home buyers to access their superannuation and slashing stamp duty.

You can understand the appeal. Housing is suddenly a hot button issue getting more political by the day as growing numbers of people worry they will never own a home, especially in Sydney or Melbourne.

Accessing super seems like a fine idea; a good way to at least ensure you have a roof over your head even if your super savings are on the slim side when you retire.

Better still, raiding the super and cutting stamp duty for first home buyers isn’t opposed by the same property lobby groups that fiercely oppose changes to negative gearing and capital gains tax incentives for investors.

So these ideas are relatively safe political bets.

The danger is that the federal government will actually implement the super access idea in the May budget.

They are barking up the wrong tree.

According to Eslake, among others, both these ideas are dangerous and could well inflate the market price for houses.

He thinks stamp duty concessions or exemptions to first home buyers are a bad idea because the money will simply flow to housing vendors.

“It will simply encourage buyers to pay to vendors what they don’t have to pay to state governments by way of stamp duty – that is, they will simply result in higher property prices, just like cash grants to first home buyers do. “

Eslake explains why these policies are so popular. They benefit, he says, “the nine million or so voters who already own at least one property, and in particular the two million or so voters who own more than one – by pushing up the value of the properties they own – at the expense of the roughly 100,000 people who on average each year succeed in becoming home owners for the first time.”

Allowing first time buyers to access their super savings to buy a home is also a bad idea.

First, this proposal would have “exactly the same effect as measures such as cash grants to or stamp duty concessions for first time buyers.”

Namely buyers will simply put down a larger deposit on the purchase of a first home to pay more than otherwise.

This would result in “higher housing prices, rather than higher rates of home ownership”.

Former prime minister Paul Keating, credited as the architect of Australia’s superannuation system, also urged against using super to buy a home, based on his horror that a system that was globally admired could be tampered with. But also that it would inflate prices.

UTS professor of finance Ron Bird said this week, why not use super? Keating’s objections were possibly ideological, he said.

Bird agrees super should not be used to fund a holiday for instance, but points to buying a house as the same kind of sensible investment that super funds like use – nice, steady reliable property.

Bird says analysis by his team “shows that home ownership will do twice as much for the welfare of such people than compulsory superannuation will ever do. There are many reasons for this including that home ownership is a good investment that yield returns that come at much lower costs than those associated with having funds tied up in superannuation.”

Bird concedes liberating super would drive up prices but suggests,  “The answer surely lies in pursuing other policies aimed at  increasing supply or decreasing demand such as limiting negative gearing, something with which Keating should be well familiar.”

On increasing supply, there’s a need to chip in here and say it’s clear that way too many people have drunk the property industry Kool-Aid. Of course we need supply, but let’s never be fooled there can ever be enough to actually improve housing affordability, because the mere whiff of a prices becoming more affordable – that is, falling – would see developers exit the market quick smart.  Supply would cease.

This is rational behaviour. No-one wants to lose money or go broke.

Super access not super idea

Eslake says accessing superannuation savings would also mean lower retirement savings for those who take up the option.

The average rate of return on superannuation savings, he says,  is “typically higher, over the long run, than the mortgage rate, especially in after-tax terms. So a person who used some or all of his or her superannuation savings to finance part of the deposit on the purchase of a first home would likely be worse off, financially, than someone who accumulated the required deposit over a longer period from non-superannuation savings (and thus entered home ownership at a later stage).

“Ultimately, that runs counter to the principle objectives of the superannuation system, which are to enhance people’s capacity to support themselves in retirement, and to reduce the proportion of the retired population who are wholly reliant on the age pension.”

An expensive notion

Eslake also points out that the proposal would cost the government dearly in lost revenue.

Superannuation earnings, including capital gains on superannuation savings, are taxed at 15 per cent, whereas capital gains on owner-occupied housing are exempt from taxation.

He points to PricewaterhouseCoopers work that estimates the revenue loss from a similar scheme in Canada as $1.1 billion in its first year, $0.6-$1.0 billion a year over the following nine years, rising to $2.1 billion after 35 years. The total bottom line budget impact is estimated at $31 billion over 35 years.

Eslake says the original Parliamentary sponsors of the Canadian scheme now confess it was a mistake.

Superannuation funds are also not keen on the idea, according to reports of what they told an ASIC forum recently.

They’re already worried about longer lifespans and higher cost of living. Apart from inflating prices.

Tax foreign investment – will that work?

Eslake is more equivocal on the idea of taxing foreign investment as a way to bring down prices.

Foreign investors have long been blamed in the popular press as a reason that local first home buyers are squeezed out.

Canada has a similar problem and recently did something very effective, it seems, to curb its runaway housing market: it now taxes its 13 per cent of foreign buyers 15 per cent on the purchase price.

House prices in Vancouver in November were down more than 5 .3 per cent and over the 12 months to January they fell 18.9 per cent, according to reports.

There’s big debate about the level of investment from foreigners in Australia but latest figures say its 11 per cent in Sydney, just shy of Vancouver’s rate, so why wouldn’t this tax work in the place with the highest house prices?

Eslake says he’s not opposed, “in principle, to taxes of this nature – either to introducing them, or increasing them.”

In Australia though, he thinks they are a “distraction from the main drivers of the deterioration in housing affordability”.

And deeper analysis on the figures, he says, has shown that “foreign investors are not a major source of upward pressure on Australian capital city house prices, so imposing new or higher taxes on them is not going to have a major impact on house prices. “

“The situation in Vancouver may be different, I don’t know: if foreigners have been a larger factor in that market, then taxes on foreign investors would have a bigger impact.

“I don’t think it’s desirable to be targeting a fall in house prices of that order of magnitude – if that were to be repeated in Australia, I suspect that there would be some significant damage done to both the economy and the financial system.”

He could well be right on that score… as a society we are now massively wedded to our house values –  symbiotically attached to how they perform, for better or for worse.

Geographic tweaking

One idea that should catch on that capital gains tax and negative gearing regime could be tweaked geographically, so that areas that don’t need the heat taken out of the market would be exempted from the changes.