Owning your own home may become a ‘great Australian pipe dream’ for some first home buyers. The Federal Government can employ a number of policies to improve housing affordability. The crucial question remains how does the government address housing affordability without fueling higher demand?
By Associate Professor Robert Bianchi, Griffith Business School
The 2017 Federal Budget proposes an initiative to allow first home buyers to accumulate their housing deposit in their superannuation fund. The announcement proposes that potential first-home buyers who make additional deposits above the compulsory 9.5% contribution rate, can accumulate these savings in their super fund. These additional contributions are subject to a lower 15% tax rate (rather than earnings being taxed at their personal marginal tax rate). This initiative attempts to address housing affordability in Australia’s capital cities, especially in Sydney and Melbourne. At face value, this Budget announcement is a novel concept that seeks to address the challenges facing first home buyers. Despite the innovation of this government proposal, these changes complicate superannuation policy and does not address some of the core problems of housing affordability.
The 15% superannuation tax will eat into traditional savings
Young Australian savers exploiting this new initiative will be charged the conventional 15% super tax when they make their additional contributions. A deposit $100 of additional savings in super and you start with $85 because you are taxed $15. A young worker’s super account will need, on average, approximately two to three years of earnings in a super fund before receiving the genuine tax benefits from this new initiative. This means that the tax savings of these super accounts will not accrue over the short term, but in the medium term. Ultimately, this is an interesting medium term initiative; however, it will not ameliorate housing affordability in the short term.
Contribution capped at $30,000
A young Australian worker with $30,000 of savings in this new scheme will struggle to accumulate a sufficient deposit for an Australian home loan in one of our capital cities in 2017. Whilst this initiative is a positive step for potential first home buyers, this may not be enough to help accumulate the savings they need to buy their own home in Australia’s capital cities.
Initiative does not address fundamental problems
The issues of housing affordability is a function of demand and supply, and at the moment, marginal demand exceeds marginal supply in the suburbs of Australia’s capital cities. The new super initiative for first home buyers will help boost housing affordability from the demand side but it does not address the fundamental issue of supply. We need more housing stock in Australia’s capital cities where supply is tight over the short to medium term. There were two new announcements to help increase housing supply in the 2017 Federal Budget. First, Scott Morrison announced the sale of small parcels of federal government land near capital cities. This decision assists in increasing housing supply but this effect will be small (ie. marginal) at best. The second announcement was the introduction of a $5,000 levy on foreign investors who own Australian homes which are vacant for more than six months. It is unclear whether this Budget announcement will increase the supply of rental housing onto the market or whether the foreign investor will simply pay the levy.
A small side effect
This new super initiative begins on 1st July 2017, in approximately seven weeks time. Superannuation software programs are very complex at the best of times, given the multitude of changes in superannuation policy over the years and across many decades. The 2017 Budget introduces an additional change which requires modifications in these software programs. Put simply, this sounds simple to the federal Treasurer but may be a nightmare to implement for superannuation funds and their IT departments between now and 1st July 2017. We may experience a small ‘employment surge’ in IT contractors over the next few weeks. The downside of this initiative is someone must pay for these IT changes and this means these small additional IT costs will be borne on the current members of these super funds.
Dr Robert Bianchi is not an investment advisor. Views expressed are those of the author and not a substitute for tailored investment advice.