Problem with housing affordability ‘solution’

Governments, banks and other groups have just one solution to restore housing affordability. Here’s an alternative.

Around Australia the federal governments, bank regulators and assorted other groups have just one solution to restore housing affordability – reduce the price of dwellings.

The problem with that “solution” is that a significant fall, say ten or twenty per cent, in house prices in Melbourne and Sydney would create a very nasty recession. Our economy recovered from the mining investment slump via the housing industry. Our banks have loaned heavily to housing investors and would suffer considerable losses which, in turn, would affect the entire economy.

The cost of making housing affordable using that mechanism would far outweigh any benefits we might derive. Many believe that a major correction in the housing market is inevitable and perhaps they are right but while we continue with strong migration a big correction is unlikely unless caused by an outside force like substantial changes in credit conditions and /or taxation clamps via negative gearing.

And so I want to put forward another solution with some back up proposals. My solution is strongly opposed in vast sections of the federal government and by the superannuation fund movement. Nevertheless I believe that superannuation is about reducing the government’s pension cost in funding long term retirement. Right now superannuation is not serving that function for the bulk of retirees who spend sufficient of their super money so that they can go on the full pension. And the government rules actually encourage such a practice. Meanwhile pensions for people without houses are considerably higher than those that are offered to people who own dwellings. The current generation of people under 35 are finding it extremely difficult to buy a house in Sydney and to some extent in Melbourne. And so we are bringing forward a generation of people who will not have a dwelling on their retirement and therefore will be a much bigger burden on the tax payers of the day.

In my view the logical way to lower our long term pension bill given the current circumstances, is to allow superannuation to be used to fund a deposit on a dwelling for first home buyers. But superannuation funding of home deposits can only be introduced in a soft housing market. If the market is strong it will merely push prices higher.

The combination of all the different levers that our bank regulators and the federal government have pulled are causing the Sydney apartment market to soften. And there is every indication that this softening will get worse and spread to other parts of the dwelling market.

The treasurer is promising to pull even more levers to reduce housing prices and of course the ALP is promising to limit negative gearing to new dwellings and not existing ones. That will create an ‘after market’ of used dwellings that will be lower than the new dwellings. This cocktail is quite dangerous because it might bring on the ten to twenty per cent housing fall that would create a severe recession.

So the time is now approaching when we can encourage our young people to use their current superannuation and perhaps future contributions as a deposit on a dwelling without causing the market to rise. What we will be doing is shifting money from investors to residential occupiers.

I believe that such a switch will be a tremendous development not only for our current social cohesion but will also substantially reduce the long term pension bill which is exactly what superannuation is all about. There is, of course, strong opposition from the superannuation movement for this proposal because they will not manage the money and so have less money at their disposal.

That would be right in the short term but longer term more young people would become interested in superannuation because has a real purpose for them - providing the base of their housing finance. We might end up with an even stronger superannuation movement than we have right now. Currently younger people don’t value superannuation and often have their superannuation money scattered over many funds which can be quite rewarding for the superannuation movement because of fees etc.

I know that Treasurer Scott Morrison has cottoned on to the long term benefits of this proposal although I am not sure he fully understands that it must be mixed with measures that work in the reverse direction by lowering dwelling prices. It actually works brilliantly with the negative gearing proposals of the ALP but that is asking for too much.

What is certain is that there is no knowledge in any areas of the public service to detail the measures that are required to mobilise superannuation money into housing deposits. It requires help from superannuation experts outside the public service. I don’t think the government will adopt this proposal in the current budget because the opposition is too strong. But I urge Scott Morrison to keep it in his back pocket and bring out if the current minor weakness in the apartment develops momentum and spreads to other areas of the dwelling industry.

But there are two other areas where more work is required if we are to improve housing affordability. The first is to maintain and increase supply. Currently locals councils play games and delay approvals and institute requirements which add to the cost. They are learning but there is a long way to go.

Finally in the US southern states there is a manufactured housing movement which builds houses that cost about a quarter of conventionally built dwellings. The quality may not be as good. At the moment there is no Australian approval process for them and in the US there is limited bank finance for them. The houses are movable and are only suitable for outer suburban areas. There are a number of groups looking at investing in producing them, including Meriton, but no one will touch that market without access to land and the necessary approvals.

• Lost Property: Read part one of our special series on how a generation of Australians has been kicked out of the property market.