A worrisome debt trap for first-home buyers

Nick Xenophon’s proposal to let young Australians put their super towards a housing deposit will only keep prices out of reach and increase the likelihood of an inevitable market correction.

Should the federal government allow first-home buyers to access their superannuation savings to pay for a housing deposit? Only if it wants housing affordability to deteriorate further.

But that is the proposal that Independent Senator Nick Xenophon plans to introduce to parliament. His inspiration is a similar program operating in Canada, called the Home Buyers’ Plan, which Xenophon claims has "made a dramatic difference for housing affordability there".

"With more and more Australians finding it difficult to break into home ownership, adopting the Canadian scheme would make a difference to many thousands of Australians each year," Xenophon said.

It is good to see some concern about housing affordability from Xenophon, and it’d be nice to see more concern from some of his colleagues. But improving housing affordability cannot be achieved by increasing the demand for housing.

This policy proposal would have a similar effect to increasing the First Home Owner Grant. Although quite popular, that scheme has been an unmitigated disaster that has effectively operated as a wealth redistribution vehicle from younger to older Australians.

At the very least it has done nothing to boost home ownership. Ownership among 25 to 34 year olds has fallen from over 60 per cent in 1981 to around 48 per cent in 2011; for those between 35 to 44 years old, ownership rates have dropped around 10 percentage points over the same period.

According to the Council of Australian Governments, the FHOG has encouraged first-home buyers into the market but that hasn’t resulted in greater home ownership. Instead it simply brings forward those purchases, leaving ownership rates effectively unchanged.

Of more immediate concern for housing affordability is the fact that the FHOG quickly becomes incorporated into price expectations for existing property. In the short run, the supply of housing is largely fixed which naturally results in higher prices. Consequently, these policies merely create the illusion of greater affordability and fool younger Australians into taking on a considerable debt burden.

On that basis, Xenophon’s plan will surely fail to put a dent in our housing affordability crisis. Such a plan has also failed -- contrary to his claims -- to improve affordability in Canada.

Housing in Canada is arguably more expensive than in Australia and housing affordability is poor in both countries. The International Monetary Fund noted that Canada was one of just two OECD countries with a more overvalued housing market than Australia.

Graph for A worrisome debt trap for first-home buyers

It is also undesirable for younger Australians to risk their retirement savings on a single asset. Our superannuation system plays a very important role in our retirement plans and that shouldn’t be compromised simply to bid house prices increasingly higher.

If Xenophon is serious about addressing housing affordability -- and I hope he is -- then there are a range of policies he could pursue. If he wants to boost home ownership he could look at reforming our overly generous negative gearing scheme (Why negative gearing is Australia’s biggest policy failure, July 9).

If he wants to reduce prices and demand then he could lead the push for greater capital requirements on Australian banks or macroprudential policies, which would put a speed limit on the amount of risky lending that our major banks can undertake (Murray must address the moral hazard in housing, July 16).

If he wants to reduce prices and boost construction, then he should be lobbying his state government to ease the supply-side restrictions that artificially reduce land supply and boost prices.

It is time our politicians -- at both the state and federal level -- began to take housing affordability seriously. If housing becomes too far beyond the reach of younger Australians then the inevitable result is a correction that could wreak havoc across bank and household balance sheets and the broader economy.

The simple reality is that the people who cannot afford to buy a house now will eventually become the same people who dictate house prices for the entire country. On that basis alone, housing affordability will eventually ease regardless of policy but that transition will prove a lot less painful if our state and federal governments take a more proactive approach. 

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