Pearls and Irritations

Australians frozen out of the housing market cannot expect that government is going to do anything that effectively closes the gap between current house prices and what most of the unhoused could afford as a deposit. Modern politicians of all stripes are all agreed that their political survival depends on doing the maximum to sustain the prices that houses are currently commanding.

For many of them, indeed, they have personal stakes in this outcome. Not only is their family home by far their biggest single asset, but their investment homes, and most politicians own at least several, represent the biggest part of their savings, apart from superannuation, for their old age.

But even if their own interests happen to coincide with those of the haves, at the expense of the have-nots, their calculation that there is no political plus in bursting the housing bubble is simply common sense. Many more Australians own or are buying their own homes, (and sometimes investment homes) than there are renters, including people desperately trying to buy a house. For those inside the system, sustaining market prices is critical as security for debt (including mortgages) attached to their house’s value, and to their general sense of security and well-being. It is not unlikely, moreover, that some of the value of their superannuation investments is tied to land prices.

Those who are inside the system can claim, belligerently, that their decision to invest so heavily in land followed strong signals given by government over their lifetimes. Governments subsidised their savings for house-deposits. It exempted principal homes from all manner of taxes, including capital gains taxes and land taxes. It gave special treatment, denied to renters, to exempt the value of principal homes in calculating entitlements for the social welfare system. Against a good deal of criticism, it heavily subsidised the buying of investment homes. For more than 50 years, there have been no effective death duties, and only indirect wealth taxes in Australia.

Taking away any of these subsidies and concessions would be seen, even by many members of the Australian working class, as repudiation of a social contract and effective confiscations of private wealth. There’s little point in arguing the fact – and fact it is – that all the concessions involve massive transfers of public wealth to private hands – transfers that are increasingly difficult to justify when there is pressure to reduce expenses to government and to retire public debt.

The transfers, naturally, are the very opposite of progressive. Australians with the highest incomes receive, whether in cash or terms proportionate to their incomes (and existing wealth) the biggest subsidies. People in the middle classes, including those who are in class 3 of the five-class socio-economic status class system, do well, if by no means as well as those who are already the best-paid, and already the wealthiest. But the bottom 20 per cent of the population, most of whom do not own houses, benefits hardly at all. What they collect in what purports to be compensation of sort – in the form of rent subsidies or access to an ever-diminishing amount of public or social housing – amounts to a good deal less in total cost to government than the cost of money passed over to groups who scarcely need it.

Wealth is now concentrated among our oldest citizens. But only the better off of them.

It is not only federal governments which have political vested interests in high housing prices. State and territory governments are increasingly wedded to high land prices as a source of revenue, and their manipulations of the supply end of the system, have the practical effect of maintaining high prices. This is so even as some governments are attempting to influence demand, for example by attempting to densify populations, to increase the mixture of high and medium density housing, to increase, slightly, the quantity of social housing, and to restrict urban sprawl. There are also moves, if desultory ones, to encourage Australians to seek smaller houses, instead of houses which have come to have, on average, the biggest “environmental” footprints on earth, and to push labour force and supply-chain reforms and cheaper construction techniques. These measures, if steps in the right direct, have less impact on house prices than those caused by restricted access to land.

Politicians and the economically literate understand very well that first homeowners’ grants, stamp duty concessions and other measures ostensibly designed to improve the bargaining positions of first home buyers are doomed to failure: indeed, that they will cause prices to rise without improving the access of those least able to compete. When politicians propose schemes, such as allowing first home owners to access their superannuation savings so as to get a house deposit, they are consciously playing a cruel populist game with voters in the sure and certain knowledge that those who take it up will be impoverished over the course of their life.

There has been a long tradition in Australia to encourage the aspiration to own a home. Menzies, in particular, saw home ownership as a worthy aspiration for all Australians which would increase their security (not least after the horrors of Great Depression evictions) and self-reliance, and from his political point of view, their innate conservatism. But the popular aspiration -– more developed in Australia than in most other countries — developed before mass superannuation, the other great family savings and investment idea, and the two in tandem have had, for many, a somewhat perverse effect.

As investments, both have been directed at providing for a comfortable retirement. Particularly with superannuation, but also with housing, there was the notion of the sinking fund by which a retired couple could draw in the last years of their lives. Many older couples downsized. For poorer people, this might be supplemented by partial access to an aged pension, and some other concessions intended for the poorer aged.

Over the years however, the typical Australian aspiration has changed. Many people are becoming more focused on passing their wealth on to their children than on their comfortable old age. Once, only a tiny proportion of Australians received anything of substantial value in inheritance, and, even then, very large sums were subject to death duties. Now a good many Australians aspire to live off the (heavily tax-subsidised) superannuation income without drawing on the capital sum.

Likewise, they seek to preserve the value of their house, instead of borrowing against it, other than for more investment purposes. Their intention is that all of the wealth, or as much as possible, can be handed on to their children. This is a goal that is quite possible for perhaps 40 per cent of Australians. Achieving that goal is among the reasons for popular resistance to aged care funding proposals that involve effective transfer of control of housing after people move into retirement or aged care homes.

Wanting to leave money to your kids is worthy enough in principle. But its relatively easy achievement for wealthier Australians is more a function of the favourable tax environment than the parents hard work, prudence, industriousness and saving. Those aged Australians who miss out – and at least 15 per cent do not own their own home and many more do not have the superannuation nest egg – have effectively subsidised those who have already had the lion’s share of a transfer of public goods.

$160b a year is inherited by children — most aged 60 or more.

People are, these days, marrying later, and having children later. They are also living, on average, much longer. What this means is that transfer of their wealth to the next generation – and most estates go to spouses and to children – is increasingly tending to occur when the children are already in their 60s, sometimes in their 70s. They are themselves retiring or are soon to retire. Most of them will have already paid off their mortgages. Receipt of the inheritance may subsidise some extra consumption – an overseas trip – but otherwise goes into general savings, or, in some cases, in very tax-handy ways, into the superannuation nest egg.

There was a time when a family with children at school, struggling with a mortgage and other costs of maintaining a family, would find a $200,000 inheritance at age 45 a wonderful boon. It would allow some or all the mortgage to be retired, HECs debts to be satisfied, and an increase in disposable income. It might allow the purchase of a holiday house or something which materially increased the standard of living of the whole family. It might also allow the bank of mum and dad to give, or put aside, substantial sums for the children to use in due course as deposits on their first homes.

When the windfall is arriving up to 30 years later than it once did it is only rarely making an enormous difference to the options available to the recipients. Most will have already passed the periods of their lives when they are under most substantial stress: many are indeed quite comfortable and looking to a comfortable retirement. They still have the capacity to be the bank of mum and dad, albeit to children already in their 40s, who would have been much better off had they had access to the money when they were planning a family. The money is a windfall, and welcome at any time (we must assume that no one is praying for their ancestors to die, least of all for the inheritance) but it is simply not the boon that it could have been.

All very well for them, anyway. Up to 60 per cent of Australians will inherit from what’s left of their parents’ super and the value of their houses when the parents die. About 50 per cent of the estates are worth $600,000 or more (though it may have to be divvied up among several surviving children) and some will get far more. Figures from the Grattan Institute a few years ago said that about 20 per cent of estates are worth more than $1 million, and seven per cent more than $2 million. Property is usually the biggest component. If both parents are now dead, children average about 75 per cent of the estate, with other family members, such as nieces, nephews and grandchildren getting about 20 per cent.

The average size of estates is increasing at a rate about two per cent higher than inflation. This year, about $160 billion will be passed on to the next generation – most of whom, as I say are already past the age of 60. That is a good deal more than the cost of the national disability scheme, and the pension system.

Naturally, most of the money will be going to the already comfortable. $70 billion will be transferred to elderly children already among the top 20 per cent in terms of wealth and income.

About $12 billion will be divided up among the poorest 20 per cent of the population. Most won’t get much, mostly under $20,000. These are already the most dependant on aged pensions and other welfare payments and have access to the fewest resources with which to deal with social, financial, and economic problems. More than three quarters of these do not own houses, and a good number do not even have security of tenure where they live. They will not have much to pass on to their children or grandchildren. Even considering their pensions, they have no great reason to think that they have been well treated by the tax system, or that the money “lavished” on services to them has matched the very favourable tax treatment that so many others have received.

This is a system by which most of the wealth of the nation has been progressively transferred to the oldest third of the population, not least with massive transfers of public wealth to the richest oldest Australians. But the poorest quarter of older Australians live in poverty, or, at best, in austere dignity.

Let’s do something outrageously useful for our renters. Instead of for the richest 40 per cent who don’t need help.

If it is practically and politically impossible to claw back, or wind back, that preferential treatment for the richer old, is it possible to rework the system so that there is more equity and fair treatment for the poorer folk? Something more than allowing people to carry on, without building their wealth, or their income, or their security. Something which allows them to aspire to plan their old age, to have some real choices, and the feeling of the support of the community.

Many tut-tut about the cost of the national disability scheme – which is, of course, closed to most elderly Australians – and talk of having to restrict it before the nation goes broke. Yet the cost of extending NDIS services to the poorer elderly, on top or accompanied by home and community care services would be less than the regular wealth transfer from the tax system to the richer elderly. Seen less as an extension of welfare, and more as a recognition of the unequal assistance that poorer Australians have received from the state, it might also be seen as an investment in healthy and happy old age rather than a drag on the system, in the manner of defence expenditure and subsidies to fossil fuels.

The most outrageous suggestion I would make is that government change the tax and superannuation treatment of rent payments. Consider, say, a single man on an income of less than $750 a week, or a renting couple on an income of $1500. Suppose that government decided to pay into their superannuation fund a sum representing anything they paid in rent over 20 per cent of income. Not as a rent subsidy, which might continue. But as recognition that renters miss out compared with homeowners. Super funds would not be directed about exactly how they spent this extra income, other than that it should fund and operate new housing schemes, operating independently of states and territories, whose bona fides can be scarcely trusted. Public schemes – open to the poorer half of the community – not only for serious welfare cases and people with special needs.

Even thinking about it would cause a furore, whether about where the money would be coming from, or about the fundamental inequity of giving some payment not available to a houseowner. When someone insisted that it be funded with new money — or savings — one could always carefully suggest that it could be paid for by, say, abolishing negative gearing. Or abolishing the complete exemption from tax of any principal homes reckoned to be worth $1.5 million or more.

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