Source: Anna Nekrashevich from Pexels.
  • With house prices surging, the issue of affordability is now at the forefront
  • Tim Wilson has campaigned to allow early access to super to buy a first home
  • Superannuation funds and the Labor party oppose Wilson's campaign
  • The Grattan Institute have suggested instead the focus should be on cutting red tape to increase housing supply
  • Meanwhile, other lobbying groups want negative gearing scrapped to reduce house prices

The debate on whether allowing people to dip into their super to help buy their first home is continuing to heat up.

House prices have continued to surge across the nation.

But now there is a concern of housing affordability constraints with a runaway property market.

While rising house prices are great for investors and those who currently own a home, they are not so great for first home buyers wanting to get their foot in the door of the market.

Owning a home is and continues to be an important part of the Australian dream. It represents stability, independence, and freedom of reaching adulthood while being a sound, long-term investment to build wealth well into retirement.

However, home ownership has continued to decline for decades, particularly for the young and poor.

According to the Grattan Institute, in Australia today, fewer than half of 25-34 year olds own their home.

Home ownership among the poorest fifth of that group has fallen from 63% in 1981 to 23% today.

If this trend continues, it is predicted that by 2056 just two-thirds of retirees will own their homes, down from nearly 80% today.

And with historically low interest rates and a raft of government stimulus fuelling house prices to record highs, as well as temporary legislation that allowed Australians to crack open their super funds, the debate over what to do about young and poor people being left behind on fulfilling the dream of home ownership is back at the forefront of public policy.

But what should be done about this issue?

The Home First Super Second campaign

The most notable proponent of allowing people to access their super early to buy their first home is Tim Wilson – currently the Chair of the House of Representatives Standing Committee on Economics.

Campaigning on a catchy slogan ‘Home First, Super Second’, Mr Wilson has passionately fought against the big superannuation funds sector, who argued Australians’ super balances will not be large enough for retirement.

Mr Wilson has accused the super funds – which has reportedly spent hundreds of millions of dollars every year on funding campaigns to “reinforce this fear” – that it is simply a scare campaign to lobby for increasing compulsory superannuation contributions from 9.5% to 12.0%. Senator Andrew Bragg has also raised similar concerns, describing Industry Super Australia’s campaigns as “vanity advertising” that makes political statements instead of promoting a certain product or fund (an article on their “independent research” supporting their push for this policy can be found here).

“The problem is that taking more of your money now stops you from investing in the one asset you need to improve your whole life – a home,” Mr Wilson argued.

“Australians are struggling to save money for a deposit. They have savings, but they’re locked away in super. And every dollar locked into super reduces your ability to save for a home and reduces your time to get and pay off a mortgage.”

The campaign has garnered the support of Coalition backbenchers, who have pledged to push the Morrison Government to give Australians early access to their super for first home buying.

What does the research show?

Mr Wilson is right Australians are increasingly struggling to save money for a deposit. In fact, saving for a deposit is the biggest hurdle to home ownership according to the Grattan Institute – in the early 1990s, it took 6 years to save a 20% deposit on an average home. Today it takes 10 years.

However, the institute’s research does not support Wilson’s conclusion that dipping into super is the best solution.

They concede that forcing workers to save 10.0% of their wages or salary will prevent some from buying a home.

But they argue the problem with Wilson’s campaign is that allowing Australians to use their super to buy a home would do very little to increase home ownership rates.

Their research found that the poorest 20% of households in the age range of 35-44 typically have no superannuation. They conclude that allowing people to use super for housing would mainly help wealthier people buy more expensive homes.

And as basic economic analysis shows, when you increase demand for housing, this means higher prices, meaning the effect of allowing early super access for a house would disproportionately benefit those who own homes already.

Arguably cutting red tape is key

With the issue of home ownership coming to the forefront of debate, there are bound to be heated attacks from both sides.

The Labor Party (who oppose early super access for a home) and Industry Super Australia have accused Wilson of using his position as Chair of the House Economics Committee to push his own political agenda.

Meanwhile, Mr Wilson has fired back at Industry Super Australia –  accusing them of using bullying tactics to unfairly lobby politicians in favouring legislation that increases contributions to superannuation funds.

But putting aside these political swipes, the Grattan Institute has put forth another solution.

As stated before by the Real Estate Institute of Australia’s President, Adrian Kelly, the key to making housing more affordable is simple – building more houses – increasing supply such that it can soak up the increasing demand.

And in order to help more houses being built, the Grattan Institute recommends relaxing planning rules and zoning laws.

A 2019 Centre for International Economics study found that greater delays from red tape were the cause of Sydney’s higher house prices.

Furthermore, it found that many housing developments could take decades to get off the ground, resulting in cascading costs from red tape and taxes.

Research from the think tank, the Mannkal Economic Education Foundation, cite the “absurd” complexity and unnecessarily restrictive zoning that contribute to reducing the supply of housing and increasing unaffordability.

Finally, a 2018 Reserve Bank of Australia study found that zoning laws have contributed to 40% of house prices in Sydney and Melbourne. These effects have been exacerbated over the years due to the existing restrictions binding more tightly as demand continues to increase.

Although the Federal Government does not have direct control over these regulations, they can provide incentives for state and local governments to cut red tape that reduces the housing supply.

Of course, no one in the mainstream is arguing for no regulation. Zoning laws are necessary to manage the growth of cities and protecting the character of neighbourhoods. But there is certainly a debate to be had about the extent to which these rules are onerous and unnecessarily restrict housing supply.

One must conduct a pragmatic approach – a cost-benefit analysis – do the costs of these regulations outweigh the benefits they provide? With declining affordability locking prospective first home buyers out of the housing market, the costs seem to be piling on and on.

What about negative gearing?

Another solution put forth to cool house prices is abolishing negative gearing.

Put simply, negative gearing – in the context of property – is when the expenses associated with a house such as maintenance and mortgage repayments are higher than the income earned from it.

Why do this?

Some people are willing to negatively gear in the hope that the capital gains when they sell the asset will more than offset the cost.

Additionally, put simply – to avoid the extreme complexities of the tax system – investors who negatively gear a property can deduct their loss against other income, such as salary and wages, reducing one’s overall tax bill (much like how business profits are taxed by income minus expenses).

As negative gearing increases investor demand for housing – increasing prices – the Labor party and other various lobbying groups have pushed for scrapping negative gearing, what they call a “tax loophole” (for example, this was a major policy of Bill Shorten’s 2019 Federal Election campaign).

Property advocacy groups such as the Property Council of Australia and the Real Estate Institute of Australia have pushed back, calling for no changes to negative gearing in the upcoming budget.

Of course, this is to be expected. After all, why wouldn’t they defend a policy that benefits the property developers they represent?

And with Scott Morrison‘s 2016 decision as Treasurer to rule out any changes to negative gearing, there is unlikely to be any change while his Government is in power.

New Zealand in March 2021 scrapped negative gearing in the hope that it would tame the galloping house market. In terms of the short-term effects, auction clearance rates are down from 79% to 59% over the fortnight. The long-term effects are yet to be seen.

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