Cross-posted from Canada’s Greater Fool blog by Garth Turner.
Garth here. We share a few things, so I hope you don’t mind the input. You were a small business guy (albeit a lawyer) who got into politics for specific reasons. Me, too. You’re now concerned the people you represent can’t afford houses any more. Ditto. You think the middle class is reasonably screwed. I’m with you there. We tweet. We blog. And, of course, we both fondle goats.
However, Nick, I’m not loving your most recent crusade. In fact, I think you need a better research assistant because you’ve just messed up as far as Canada is concerned. The last thing you Aussies should want to do is slide down the slippery path of encouraging more moist virgins to jump headlong into inflated houses and bloated debt.
I just read this about you, dude:
Independent Senator for South Australia, Nick Xenophon, will introduce legislative changes in the Spring session of parliament to allow first home buyers to access their superannuation savings to pay a house deposit. Such a scheme successfully operates in Canada, called Home Buyers’ Plan, leading to improved housing affordability.
At a Senate Economics References Committee hearing in Adelaide today, the Inquiry heard from HomeStart Finance (an arm of the South Australian Government) outlining the Canadian scheme. In Canada up to $25,000 can be accessed for a first home, and it’s made a dramatic difference for housing affordability there.
However, Senator Xenophon will be moving for changes to Superannuation Act 1976 to allow the release to superannuation funds for a first home, with similar safeguards to the Canadian scheme. In Canada the amount has to be paid back into the super fund within 15 years.
“With more and more Australians finding it difficult to break into home ownership, adopting the Canadian scheme would make a difference to many thousands of Australians each year,” Nick said. Housing affordability in Australia has fallen for the past three decades, as house prices outstrip income growth.
An annual affordability survey by Demographia this year found Australia had the second-worst housing affordability in the world, behind Hong Kong. All 39 Australian housing markets surveyed were “seriously” or “severely” unaffordable, defined as having average house prices more than four times average income.
I confess. Once I thought like you. I even supported realtors years ago when they cooked up this scheme to allow kids to dip into their retirement funds to buy a first home. At the time we were in a steep recession with real estate plunging and the economy in a funk. So, I voted in our Parliament for a temporary program to create the Home Buyer’s Plan in order to stabilize the market and try to revitalize the home-building business. It worked, kinda. Then subsequent governments (a) made the plan permanent and (b) doubled the amount people can suck out of their registered savings.
Now, Nick, we’re reaping the bitter harvest sown when that dumbass legislation passed. Allowing first-time buyers to remove tax-free money to buy a modest home they could not otherwise afford, then restore it to their long-term retirement savings makes perfect sense in theory. In practice and experience, just the opposite.
To date the HBP has been used about 2.5 million times, with roughly $30 billion removed from savings and investments and plowed into real estate. When combined with dirt-cheap mortgage rates (I notice Aussie banks just slashed five-year rates to an all-time low) and voracious, carnivorous bankers, it’s helped push home prices into the clouds. The cost of an average detached house in two of our major cities now exceeds $1 million. (I see median home prices in Sydney rocketed 17% in the past year, to $812,000. So you know what I mean.)
In other words, if you think letting people steal money from their financial futures in order to buy houses today which they really can’t afford is going to make real estate more affordable, you’ve been spending too many evenings with the goat. The opposite is probable. In Canada, it’s fact.
But it gets worse. The evidence also shows when you allow this kind of distorting financial activity to take place, people respond badly. They borrow their brains out, Nicky. Total horniness. As I wrote on this pathetic but repentant blog recently, the kids aren’t even paying this money back – which means we’ve not only goosed houses, increased the risk of a serious correction and skewed the condo economy further – but there are billions less being saved and invested for our pensionless future.
Nick, you need to know this: the latest Canada Revenue Agency stats found almost half (47%) of the borrowers who raided their RRSPs haven’t paid anything back. So the missed payments are added to their incomes and taxed. And why would the virgins be so dumb?
Simple. They don’t have the cash. They borrowed to the max, took advantage of cheap rates and willing bankers, sucked off the tax-free money guys like you (and me) provided, and likely bought their home in a bidding war, forcing prices higher. Bad outcome. Now more Canadians have financing worth over 80% of their home values than Americans had before the big crash.
So, buddy, back off. The goal of a caring politician isn’t to shoehorn more people into debt and bad decisions, just because they want it. Instead, your role is to lead, to stand up for common sense, and battle the forces of cheap expediency and sleazy solutions.
I mean, look where it got me.