By Warwick Smith

Fairfax economics editor, Peter Martin, recenly wrote a piece defending Joe Hockey’s suggestion that we should let first home buyers access part of their superannuation for buying a home while also abolishing negative gearing.

Before reading Peter’s piece I had been firmly of the opinion it was a terrible idea to allow super to be used for housing because, just like first home buyer grants, it would just drive prices up. We should be bringing prices down if we really want to be tackling affordability for first home buyers.

After reading the fairfax article I was much less confident in my views. I tweeted that Peter’s piece had given me food for thought and a twitter debate began with people who still fellt strongly it was a terrible plan. The debate was unproductive because twitter is no place for meaningful debate unless it can be conducted through links. This blog post is aimed at spelling out my thinking on the subject.

Housing prices are clearly distorted by government policy allowing negative gearing and giving concessional tax treatment to capital gains. The economic rent from land ownership also makes real estate investment artificially attractive. We should get rid of the distortions in the real estate sector and improve housing affordability. I’ve written about this on several occasions before.

If we could wave a magic wand and reset prices and mortgages the solution would be pretty easy. Get rid of negative gearing and the concessional treatment of capital gains and increase our use of land taxes, preferably through a nationally leveraged land value tax.

However, we don’t have the magic wand and any substantial reduction in land prices would leave many people owing more on their mortgages than their homes were worth. We could readily cause our own financial crisis. In  order to avoid these problems our solutions probably need to be slow and steady. We need to keep land value rises below wage rises. This way we slowly improve housing affordability over time. The problem is that this long view doesn’t help those currently trying to buy their first home.

This is where Peter Martin’s suggestion comes in. If we were to dump negative gearing we could stall house price growth, possibly even cause prices to fall a little. If we also allowed first home buyers (FHBs) to access super for deposits, it would make housing relatively more affordable for them compared to others. Yes, it would drive prices up a little but not by as much as it increased affordability for FHBs. So long as measures are introduced that discourage housing as an investment at the same time as you increase the capacity of FHBs to enter the market, your net effect can still be to dampen price growth below wage growth.

If just getting rid of negative gearing isn’t initially enough to keep prices down then you can phase in the elimination of concessional treatment of capital gains and also phase in over a long period the introduction of land taxes (as the ACT is currently doing). These are good long term solutions but they don’t help FHBs now. Allowing them access to their super does help them now and so long as doing this doesn’t push price rises above wage growth then you’re still meeting your long term goals. Once all of the other distortions have washed through the system you could also stop allowing FHBs to use super for housing because it would be affordable for them anyway.

Sorry about the absence of data @RationalRadical.