So many times I read or hear about policies to fix certain economic problems. For instance people not saving for their retirement or the difficulty of buying a home.
The more I think about it, the more I conclude that the suggested solutions do more harm than good. It's like tackling a scorpion or crustacean; you think you've doing good by grabbing its head, but its pincers swing back and bite you!
Two recent examples.
1. Income tax Cuts. Tues night Paul Clitheroe with Tony Delroy on ABC Radio. They were talking about a proposal to cut the top marginal income tax rate to 30%. Clitheroe was (rightly) lukewarm about it.
Several callers were in favour of tax cuts, claiming that the current taxes were so high that they couldn't afford to save. They say the government should be helping them save by cutting taxes.
I say WHAT ROT! If people currently spend 100-105% of their income, then there's no reason to expect that they'd behave any differently if they get a bit more through a tax cut.
I am willing to bet almost anything that big tax cuts will simply fuel another consumer spending boom.
This will suck in imports, put pressure on our trade position, fuel consumer debt and probably lead to interest rate hikes.
So we go from nice tax cuts (albeit only for a minority) to interest rate hikes which hurt businesses, investors and homebuyers (of all income groups).
2. Access to super to buy a home. This is a fairly populist policy that people often talk about as being 'A Good Thing'. For example, Family First advocate it http://webdiary.smh.com.au/archives/margo_kingston/000387.html and no doubt others as well.
The only effect I can see this have is to inflate house prices, similar to government first homebuyer grants.
Let's say people had an average of $20k from super to put towards a deposit. If they go for a conservative 80% LVR, they can afford a bouse worth $100k more. If 90% LVR, then it's $200k more.
And history shows that if people can afford to spend more on a home, then they will, and prices will skyrocket, as people with no savings enter the market, and others can afford to pay more.
Also because of compounding, removing $20k from a 30 year's super account at the age of 30 is a much bigger loss at the age of 60. Sure they'll have a home, but their portfolio will be unbalanced (too heavily weighted to the family home). Also because people using their super may have bought in a hot market, capital gain on their PPOR will have been less than if they'd saved up and bought at another time when the market wasn't flooded with new buyers.
People with generous super (notably public servants and highly paid private sector workers) may appear to be at an advantage to the casual or self-employed worker with little or no super.
However in the end all buyers will be worse off and sellers will be the main beneficiary. Measures intended to improve affordability often reduce it and benefit the sellers most of all. And because homeowners (on average) are wealthier than renters (on average) a further transfer to sellers is regressive and exacerbates inequality.
My theme is that very often measures to help one group often have the opposite effect.
What would you want to do if you REALLY wanted to improve home affordability for first buyers?
You'd subsidise renters!
For instance you could:
- Increase rental subsidies (particularly for families of first homebuying age)
- Put a capital gains tax on the family home (to make home ownership less attractive but property investing relatively more attractive)
And if you wanted to make renting more affordable?
You'd subsidise buyers!
For instance:
- $7000 Government homebuyer grant to encourage tenants to buy
- Easy terms for housing commission tenants to buy
- Allow super to be used to buy first home
- Release more land
One unsung benefit of the last 10 years has been reasonable rents. No one's talked about this, but when rents were high, there were big problems, as there were around 1987.
Renters as well as homesellers have benefited from current economic conditions.
So have investors who bought more than 5 years ago (less in smaller cities).
First homebuyers have been the big losers, hence the emphasis on 'how can we help them'. But as I've discussed above, often well-meaning attempts to do so may have unforseen perverse effects.
Regards, Peter
The more I think about it, the more I conclude that the suggested solutions do more harm than good. It's like tackling a scorpion or crustacean; you think you've doing good by grabbing its head, but its pincers swing back and bite you!
Two recent examples.
1. Income tax Cuts. Tues night Paul Clitheroe with Tony Delroy on ABC Radio. They were talking about a proposal to cut the top marginal income tax rate to 30%. Clitheroe was (rightly) lukewarm about it.
Several callers were in favour of tax cuts, claiming that the current taxes were so high that they couldn't afford to save. They say the government should be helping them save by cutting taxes.
I say WHAT ROT! If people currently spend 100-105% of their income, then there's no reason to expect that they'd behave any differently if they get a bit more through a tax cut.
I am willing to bet almost anything that big tax cuts will simply fuel another consumer spending boom.
This will suck in imports, put pressure on our trade position, fuel consumer debt and probably lead to interest rate hikes.
So we go from nice tax cuts (albeit only for a minority) to interest rate hikes which hurt businesses, investors and homebuyers (of all income groups).
2. Access to super to buy a home. This is a fairly populist policy that people often talk about as being 'A Good Thing'. For example, Family First advocate it http://webdiary.smh.com.au/archives/margo_kingston/000387.html and no doubt others as well.
The only effect I can see this have is to inflate house prices, similar to government first homebuyer grants.
Let's say people had an average of $20k from super to put towards a deposit. If they go for a conservative 80% LVR, they can afford a bouse worth $100k more. If 90% LVR, then it's $200k more.
And history shows that if people can afford to spend more on a home, then they will, and prices will skyrocket, as people with no savings enter the market, and others can afford to pay more.
Also because of compounding, removing $20k from a 30 year's super account at the age of 30 is a much bigger loss at the age of 60. Sure they'll have a home, but their portfolio will be unbalanced (too heavily weighted to the family home). Also because people using their super may have bought in a hot market, capital gain on their PPOR will have been less than if they'd saved up and bought at another time when the market wasn't flooded with new buyers.
People with generous super (notably public servants and highly paid private sector workers) may appear to be at an advantage to the casual or self-employed worker with little or no super.
However in the end all buyers will be worse off and sellers will be the main beneficiary. Measures intended to improve affordability often reduce it and benefit the sellers most of all. And because homeowners (on average) are wealthier than renters (on average) a further transfer to sellers is regressive and exacerbates inequality.
My theme is that very often measures to help one group often have the opposite effect.
What would you want to do if you REALLY wanted to improve home affordability for first buyers?
You'd subsidise renters!
For instance you could:
- Increase rental subsidies (particularly for families of first homebuying age)
- Put a capital gains tax on the family home (to make home ownership less attractive but property investing relatively more attractive)
And if you wanted to make renting more affordable?
You'd subsidise buyers!
For instance:
- $7000 Government homebuyer grant to encourage tenants to buy
- Easy terms for housing commission tenants to buy
- Allow super to be used to buy first home
- Release more land
One unsung benefit of the last 10 years has been reasonable rents. No one's talked about this, but when rents were high, there were big problems, as there were around 1987.
Renters as well as homesellers have benefited from current economic conditions.
So have investors who bought more than 5 years ago (less in smaller cities).
First homebuyers have been the big losers, hence the emphasis on 'how can we help them'. But as I've discussed above, often well-meaning attempts to do so may have unforseen perverse effects.
Regards, Peter
