How will the Budget tackle housing affordability?
Under pressure to be seen to be doing something, it now seems likely that the upcoming Federal Budget will contain a detailed range of measures to deal with Australia’s alleged “housing affordability crisis”.
Of course, not wanting to be seen to follow Labor Party policy, Treasurer Scott Morrison will likely eschew significant changes to the capital gains tax regime or negative gearing.
To my mind, that’s just as well - as I seriously doubt these long entrenched tax measures have contributed much to the escalation in prices in the hot markets of Sydney and Melbourne in the past few years.
If tax and investors were the only problem, property prices would be taking off across the country – and they clearly aren’t.
That said, that’s not to deny the fact that there are some simmering problems in the housing sector. But in dealing with these problems, we need to ensure we don’t make matters worse rather than better.
The first rule of public policy should be: do no harm.
In that regard, as most sensible economists have been quick to point out, anything that merely enables households – especially budding first home buyers – to simply bid more at property auctions is a cruel con on those that the Federal Government purports it most wants to help. In supply-constrained markets such as Sydney especially, all demand side subsidies would do is enslave buyers within even larger debts at the expense of the lucky pre-existing owners that would sell into an even stronger market.
For Scott Morrison, one clear test will be whether he avoids the temptation to allow first home buyers to dip into their superannuation to save a deposit on a home.
Although some on this backbench are clamouring for such a policy, it is simply horribly flawed in design - and opens up a potential pandora’s box of politically popular pet projects that we could next waste superannuation on.
If the Government truly wants to tinker with superannuation in the name of housing affordability, a far better policy would be to reconsider the ability of self managed super funds to borrow with abandon and splash out on investment properties.
The newly installed loophole over recent years that has allowed SMSFs to borrow to fund property acquisitions – providing the loans are non-recourse – has arguably had a greater effect in boosting investor demand for property in recent years than the much longer standing capital gains and negative gearing provisions.
Aiding and abetting this unhealthy development is the fact that encouraging SMSFs to buy properties does not constitute “financial advice”, enabling a cottage industry to develop among property spruikers and accountants.
The result is a multitude of small and insufficiently diversified property-based SMSFs around the country, all partly subsidised by the generous superannuation concessions provided by tax payers.
Other housing related measures rumoured to be in the budget seem more sensible – like encouraging greater social housing, and taxing newly built properties left vacant by foreign investors.
As regards foreign purchasers, I’d also like to see a much tougher crackdown on illegal purchases of established properties by those that purport to be residents but really aren’t. What we don’t want to see is local property prices inflated by global money laundering and/or the simple desire of rich people in risky countries to park their money in safe havens like Australia.
Allowing pensioners to sell their homes without risking their pensions might also free up some under-utilised properties for sale, but we could then be left with an even more uncomfortable policy whereby some with millions in freely available non-housing assets are still claiming social welfare. All this raises the vexed issue of whether the generous exemptions for the family home in the pension assets test still make a lot of sense.
A final point to note is that the allure of property, given the capital gains tax concessions and negative gearing benefits, has only been enhanced in recent years as fiscal drag pushes more Australians into higher marginal tax brackets. It’s symptomatic of the fact the whole tax system is creaking under the strains of gross distortions and root and branch reform is desperately needed.
Sadly, however, we seem destined to get more tinkering around the edges – whereby new distortions are introduced to counter some of the unintended consequences of older distortions.
The only ones smiling through all of this is the nation’s tax accountants – as greater complexity and loopholes keeps them in high demand.
Published: Wednesday, April 12, 2017
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