Everyone’s been lining up to tip poo on poor Joe Hockey’s thought bubble about using super for a house deposit, with Paul Keating, Peter Costello and David Murray jostling at the head of queue.
Actually it’s not so stupid as an investment option, mainly because Australia’s super funds are so hopeless.
According to Chant West, the average 15-year return from super (balanced option) is 5.9 per cent; the average 15-year growth rate from house prices is exactly the same, tax free.
Super funds should be doing a lot better than 6 per cent per annum compound, but they take a conservative approach to asset allocation to reduce short-term volatility, even though their customers are in it for the long term and are not affected by volatility.
So, if a 30-year old leaves $10,000 in super or uses it for a house deposit – it doesn’t matter which -- that money will turn into $75,000 when they’re 65.
Meanwhile, the Australian sharemarket has produced a 30-year compound annual growth in total return (including dividends) of 11 per cent.
In a plain sharemarket index fund, doing no work at all picking stocks, that same $10,000 turns into $385,000 over 35 years. A decent stock picker could get 14 per cent without much effort, which would turn that $10,000 into $1 million over 35 years.
As it is, Australia’s plodding super funds can’t manage to outperform residential real estate, so in terms of wealth creation it doesn’t matter whether a 30-year old invests in super or a house.
The problem with allowing super to be used for a house deposit is that it would allow more young people to buy one, and we can’t have that.
Australia’s taxation, land management regulations and infrastructure processes appear to be specifically designed to stop kids owning a house, and to enhance the value of existing homes so that the wealth of baby boomers like me increases.
House prices have tripled in 15 years and are now actually accelerating, not because it costs any more to build a house but because of rising land prices. The increase in house prices over the past 15 years exactly match the increase in the price of land per square metre -- in other words the price of construction has not changed.
Land prices are rising because of a combination of demand and supply: demand is being deliberately increased by negative gearing, which is designed to increase the supply of rental housing, but supply is being deliberately restricted, so negative gearing plus population growth only increases the price rather than the supply.
The Urban Development Institute of Australia nails it in its submission to the Senate inquiry into housing affordability, which is due to report next month:
“A key problem … is that the Commonwealth has a strong incentive to facilitate population growth, as it stands to benefit through increased GST, income tax and company tax revenue, whilst State Governments, which bear greater infrastructure and services costs, have an incentive to resist growth.”
Senator Bob Day also points out that State land management agencies made a profit last year of $600m.
In his submission to the Senate inquiry, Senator Day said: “While state governments embraced the opportunity to garner windfall profits by stifling the release of land, they were also responding to a wider ideological agenda driven by a powerful planning community that sought to curb the size of our cities."
“Urban planners, by promoting urban consolidation and at the same time demonising urban sprawl, have inflicted enormous damage on the economy and society.”
The UDIA cites state and local government zoning, planning and approval processes, which slow down development to the point where it can’t go ahead because of holdings costs, plus the triple duplication of environmental approvals that are needed from the federal, state and local governments under the Environment Protection and Biodiversity Act.
Also: “UDIA continues to be concerned with the level of cost recovery undertaken by the Commonwealth in the application of the EPBC Act, as it is inequitable and unjustified where the community should expect a Government agency to function within budget funding. Ultimately, costs recovered from developers under the EPBC Act must be built in to the cost of a new home, increasing prices, reducing supply and worsening affordability.”
Moreover the taxes on new homes are staggering. In its submission, the UDIA states: “various government taxes and charges (account) for up to 44 per cent of the price of a new house in some cities”.