It is pretty simple, really. Compared to other countries, we have always had fairly high house prices relative to wages. Why? Well, sure, we value owning our own homes.
But that is not really the major issue. The main problem is that our tax, and now superannuation, system includes incentives for investors to invest and speculate in residential property. Importantly, this is different to many other countries, including America where there are tax incentives for owner-occupiers, not investors.
Negative gearing has been around a while, and is probably the major reason why our house prices have been relatively high over the long-term. However, around the same time that our economy was beginning to get a huge boost from the resources boom created by the amazing growth of China, and now India, the Howard Government reduced the capital gains tax payable on investment property.
Add to that the affect of interest rates decreasing to very low levels, for investors and owner-occupiers, and then the First Home Owners Grant (FHOG), which was doubled for a period, and you have a very, very significant boost in demand which fed immediately into higher prices. The rapid increase in prices brought in speculators thinking that their path to riches, and more investors hoping for a comfortable retirement, could be obtained from property.
Sure, some first home buyers were lucky and got in early before prices got too out of hand. However, for most the FHOG went straight to sellers in the form of higher prices.
And now, with the imminent introduction of the First Home Saver Scheme (FHSS), the first initiative by the Rudd Government to address the crisis, which will decrease demand for up to 4 years from us would-be first home buyers, we have the remnants of a final decision by the previous Government. In a parting gift to the wealthy, they allowed DIY Superannuation funds, which have an average balance of over $800,000, to gear into property investments! Whack!! (Did you feel the extra ton of bricks come down on your shoulders!!)
OK, I do not want to appear politically biased here. Let me be very clear that I do have major concerns about the new Government�s FHSS, because the only differences between that and doubling the FHOG is that we will be obliged to save and make our own contributions to get the Government co-contribution, and demand will decrease for a period.
But here is the important part. If nothing is done to take away the incentives from investors, be prepared to hand over all of your own savings, and the Governments co-contribution, to investors in the form of higher prices, just like the FHOG. The saving scheme will commence in July 2008, and will be inaccessible for 4 years. So investors will be positioning themselves in the run-up to July 2012 in anticipation of the huge surge in demand from first home buyers. |
