Since our last tax insight, the Labor party has released some measures on housing affordability, which mirror some of the points we picked out as potential levers for improving affordability without causing the market to free fall.
- Accessing superannuation. Anyone who remembers the effect of the first home owner’s grants knows that any “free” cash given to a buyer simply flows to the sellers through higher prices. The typical first home buyer is under 35. The average superannuation balance for this age group is between $15,000 and $50,000 (ABS 6523.0), and worse for females than males. Assuming no Government would allow full access to the superannuation balance, this means access to a very small cash amount in the short term, flowing through to higher prices in the medium (if not short) term and ultimately insufficient savings in retirement. Not a great policy.
- Prevent superannuation funds borrowing to purchase investment property. This is a commendable idea. Superannuation provides significant savings that are deployed in other parts of the country – for example, infrastructure investment (interestingly, the Government has changed the way it will measure the budget deficit to allow greater infrastructure spending itself – we suspect a spending spree is coming up!). It does not need to be spent purchasing an investment property. This will have an immediate cooling effect on demand and therefore prices.
- Vacant property tax. Victoria imposes a tax on vacant property to discourage (particularly) foreign investors purchasing property and leaving it empty, an interesting phenomenon until you understand that “second hand” property is not valued as highly as new property by some cultures. Foreign investors don’t vote and this is likely to be far more palatable politically, as a result. The same applies to other measures that target foreign investors such as the additional fees and penalties that Labor has proposed.
- Prevent foreign investment in capital cities. Although this sounds draconian and it is hard to predict how hard the downward pressure will be on prices as a result, Beijing is an example of a city that has taken this very measure to prevent anyone who does not live in Beijing from purchasing property in the city. This is unlikely to drive up the desire for people to move to the major cities in Australia as the likelihood is, if you are living somewhere else and buying property in Sydney or Melbourne, it is an investment property and you have a home elsewhere. It will hit foreign investors much harder. But it has the potential to drive investment in new property in regional centres, where price inflation will not be as sharp. Of course, the Government will need to invest in infrastructure to connect the regional centres better.
- Move to Tamworth. Somewhat tongue in cheek, many of the other measures can be used to drive investment and relocation outside major cities. However, this has to happen with job growth in those regional centres. Even with remote working and “high” speed internet, most of Australia’s jobs are in offices and factories that require or expect presence in the building. Better infrastructure would help – examples where this is already happening are Sydney and the Central Coast, Brisbane and the Gold Coast and Sunshine Coast where workers regularly commute between centres.
Any action at the Federal level has to be supported by measures by the State and Territory governments. An important one is encouraging the churn of properties, particularly to encourage downsizing by families when they are able to. The imposition of land tax on primary residences based on a matrix of factors (age of occupants, income, dependents, size of property and the like) would encourage older families with no dependent children to move to smaller properties more suited to their needs. Replace stamp duty with a broader based land tax and churn should go up. Add to that increased land tax rates for investments, perhaps increasing in multiples for subsequent properties, and applying the thresholds nationally so as to discourage people holding investment properties in each State and Territory will result in increased supply and moderated prices. The Commonwealth will need to play its part by changing rules around access to pensions so that the surplus cash realised from downsizing does not adversely affect pensioners and, again, this can be phased in.
There is much fear about the disaster that falling house prices will have on home owners. If you own your principal residence only, any price movement is meaningless – price is only relevant if and when you want to sell. But being in the market means you already have a leg up – the movement in your house price will largely reflect movements in other house prices, so you are not terribly worse off. If you own an investment property (like many of our politicians and this writer), tough – housing affordability is not about you, but about the people who cannot afford to buy the financial security and emotional wellbeing that owning a home brings. Government policy should definitely seek to mitigate the impact on investors through phasing and grandfathering that we discussed in our last blog – but it is not a reason for not acting. However, just over a week out from the budget, it is not looking like there will be any movement on this front.