With the Turnbull Government under pressure from its own party, and having categorically ruled-out changes to negative gearing and the capital gains tax (CGT) discount, it is reportedly developing a complicated alternative to improve housing access for first home buyers. From Peter Martin:
Within the Coalition’s housing work group Alexander has been tossing around an extraordinary scheme derived from the hearings that has the potential to guarantee it the next election.
It’s in three parts: The first would require APRA to continually adjust the rules governing how easily banks could lend to investors, each month; just as the Reserve Bank adjusts interest rates each month. But rather than targeting consumer price inflation as the Reserve Bank does, APRA would target house price inflation. Too much – perhaps more than doubling every 10 years – and it would make it harder to lend to investors, too little and it would be more generous. Home price growth would become predictable rather than scary.
The second part would be to advantage genuine buyers. Right now they are required to pump 9.5 per cent of their wages into superannuation. Instead they could allocate that 9.5 per cent to pay off the principal (but not the interest) on home loans, meaning they probably wouldn’t need deposits and could start buying early. The usual criticism of any measure that advantages first or genuine homebuyers is that it would push up prices leaving them no better off. But this wouldn’t, because of the role of APRA in restraining loans to investors to restrain price rises. It would just tilt the market back towards owner-occupiers…
Which brings us to part three. Because part of the homes would be owned as “superannuation”, that part would count toward the pension means test, keeping a lid on the cost of the pension. And because steadily increasing home prices would be as good as guaranteed, those increases could be borrowed against to fund fortnightly payments in retirement. For someone who bought a house at 25 and then retired at 65, the payments would be big.
…if Turnbull could pull it off, or something like it, he would stand a chance of becoming the greatest Australian prime minister since Menzies.
I do not share Peter Martin’s glowing (sarcastic?) enthusiasm for this scheme.
To me, it is an awfully complicated way to avoid admitting that fixing negative gearing and the CGT discount is warranted. Moreover, rather than actually improving housing affordability, it appears like a way to keep Australian home prices at artificially high (and rising) levels permanently without taking account of the negative externalities.
Given APRA has to date been so reluctant to rein-in speculative mortgage lending and house prices, what makes Peter Martin so confident that it will take the necessary action in the future? In fact, Martin pretty much admits that house prices would continue to outstrip growth in incomes in his explanation of part three of the Coalition’s plan: “steadily increasing home prices would be as good as guaranteed, those increases could be borrowed against to fund fortnightly payments in retirement… the payments would be big”.
Blind Freddy knows that there are a bunch of policy levers that can be used to make housing more affordable, including:
- Cutting immigration to sensible and sustainable levels;
- Tax reforms (e.g. unwinding negative gearing and the CGT discount, and swapping stamp duties for land taxes);
- Tighter rules and strict enforcement of foreign ownership; and
- Land-use and planning reforms, whereby the federal government provides incentive payments to the states in exchange for reform.
We need concerted federal government action on these fronts, not complicated gimmicks that would actually maintain the pressure on house prices.
