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Creative ideas needed to fix housing affordability

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Housing affordability is a huge problem but allowing first home buyers to raid their superannuation is a dumb idea, writes Andrea Michaels.

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Buying your first home in South Australia might be cheaper than Sydney or Melbourne, but it still requires a sizeable deposit. A recent report claimed we’re now the 16th most expensive city in the world. A whole generation could be locked out of the home ownership market. What are we going to do about it?

Twenty years of rising prices might be good news for property investors who got in early, or for retirees looking to downsize, but for many people in their 20s and 30s the situation is bleak.

We all know having a house at the end of the day is an important key to a secure retirement, but we must come up with practical solutions that will work in the longer term.

Investors are the problem, but super is not the answer

Alarmingly, recent media reports have suggested the government may allow young people to use their superannuation to fund a deposit on their first home. On Monday, Treasurer Scott Morrison formally denied this option was on the table, but there are still those who believe it’s a good idea. As a tax and super specialist, that has got to be one of the most short-sighted suggestions I’ve ever heard.

Superannuation is designed to help fund retirement. Encouraging young people to take money out of super would be an economic disaster, and the Tax Institute agrees with me.

Our problem is that housing demand now outstrips supply. And this idea will just make that worse.

And where has much of this red-hot demand for property come from? From mum and dad investors, spurred on by the promise of rocketing growth, low interest rates, generous negative gearing and capital gains tax concessions.

The trend seems unstoppable. In February this year, ABS figures showed another jump, with investors now making up around half of all home loans issued.

Simply put: we need to address this problem and change our policies, not put the pension system into jeopardy. I know voters won’t like losing investment advantages, but you can carefully grandfather a reduction in the capital gains tax discount to reduce the pain.

Property as super could be a red-hot risk

A person aged in their mid 30s might have around $40,000 saved in super. Take a large chunk of that out now and how do you think that will impact on building a nest egg for retirement down the track? That’s the whole model of compound saving gone in one move.

First home buyers are unlikely to have funds left to make it up. This is the argument around debt ratio levels in Australia.

Officially you’re considered to be under ‘mortgage stress’ if your debt is more than 30 per cent of your gross salary. In Adelaide, the average price of a home is currently sitting at around $477,000 (Corelogic Index Feb 2017). An 80 per cent loan on that amount could put many first home buyers close to the danger zone, especially if we see interest rates move.

So, don’t try to tell me a young person can simply repay the super taken out to cover their housing deposit on top of a rather large mortgage. That’s likely to be impossible for most –and it could cause a bigger problem for the budget, with even higher aged pension costs to deal with later.

Budget must address affordability issues

We really can’t skirt around the issues: negative gearing for property investors needs to be looked at, perhaps modelling a carry forward loss scenario (like what happens with hobby farmers).

While we need to find creative ways to help first home buyers get into the market, we also need to increase housing supply without upsetting the economic apple cart, or creating urban sprawl.

It’s time to get creative, or at least talk about doing something outside the square. Or decide that the great Aussie home ownership dream isn’t relevant to us any more.

There’s been some good ideas on the table. Ideas like working on social housing models that use public-private funding models; carefully releasing more government-owned land to allow affordable housing developments; allowing part of a first home owner’s deposit to be tax deductible; following international examples, like building infrastructure and moving jobs into regional areas to encourage better population distribution (500 public servant jobs being moved to Port Adelaide is a good example); and new incentives for older people to downsize earlier.

Some of these are sound ideas worth exploring. I hope a few of them surface in the May budget. Just don’t undermine the super system any more. Because having a house won’t be enough to help fund us in retirement if there’s nothing left to live on.

Andrea Michaels is a tax and superannuation specialist and the Managing Director of Adelaide law firm, NDA Law. Twitter: @michaels_andrea

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