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12 Mar 2017

Every Australian should be given the opportunity to own a home

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 “Every Australian should be given the opportunity to own a home.”
 
I doubt too many would disagree with the basic sentiment of that statement. Yes, some people work harder than others, earn more, are better savers or have had better opportunities in life. I agree. I don’t think everyone is entitled to own the SAME home, just A home.
 
There’s a very real chance that some young Australians today, will forever be locked out of the property market and that others will only ever get in if they are fortunate enough to have parents who already own a home.
 
I just don’t think that is how it should be. The Prime Minister tells us we need rich parents to “shell out”, the previous Treasurer says we simply need a better job and the Deputy says we can just move to the country. It is time for the people to work out a better strategy as our political elite are clearly bereft of ideas.
 
So here’s how I would address it if I were King for a day. 👑
 
Before I start, I need just a little background. Firstly, it is important to recognise that superannuation is the preferred retirement savings vehicle of both major parties. The significant tax concessions which this vehicle enjoys are validation of this fact. 
 
Since the introduction of the Superannuation Guarantee in 1992, regular on-going contributions, combined with compounding interest, have taken us to a stage where there is over two trillion dollars currently invested in Australia’s superannuation accounts. I propose we consider a way we can use this valuable pool of savings to further help the nation, above and beyond the intended improvements in retirement incomes and positive impact on the budget in terms of reduced reliance on welfare into the future.
 
Be very clear, there are two factors which make super an outstanding investment consideration. Time (an integral component of compound interest) and the significantly preferential tax treatment it receives throughout its various phases. I am placing a caveat on those concessions. I want some of your super available to further our nation. Don’t panic, you’ll get it back as well as a capital guarantee plus interest. In fact, you may even be better off.
 
Without getting technical, the manner in which the trustee of a fund invests the money is determined by a stated Investment Strategy. The vast majority of funds include the ability to invest in so called defensive instruments, such as cash deposits or bonds. As ‘King For A Day’, I would legislate that 5% of fund all balances be invested into another fund with guaranteed returns. Think of it as a bond investment. For the sake of this article, I am going to call this fund the Developing Australia Fund (DAF).
 
The purpose of the DAF is simple; provide a pool of investment capital to be utilised in ethical investments, starting with creating a more accessible entry housing market for first home buyers, but also extending to infrastructure and development projects. The corollary as I see it is a stronger, fairer Australia with greater security, jobs growth and a more vibrant economy both now and into the future. Yes, all those things politicians promise every few years but rarely deliver. 
 
So, here’s how it works
 
All super funds are given 6 months to transfer 5% of their balance into the DAF. Funds that choose not to comply will not lose their compliance, but will have 5% of their annual growth taxed at a rate of 50%. This tax rate would also extend to 0% tax rate investments such as annuities. Additionally, 10% of all future contributions are also made into this fund or, if opting out, these are taxed at 50% rather than the concessional rates that apply. And just like that, we have a fund in excess of $100 billion to invest and the pool will continue to grow.
 
The DAF carries a government guaranteed return of 2% above the quarterly 10 year bond rate (2.97% as of last week), which is far better than what would currently be available for such an investment. Given the amount of money invested in ‘Balanced Option Investments’, which may have 40% in such defensive assets, many superannuation funds will receive a higher return as a consequence of this change. 
 
Where do the houses come from you ask?
 
Every time a State Government releases land or nominates existing public housing sites for redevelopment, a section is set aside for DAF housing or the redevelopment is used as such.  Building contracts are awarded by Government Tender, but each tender includes criteria such as work being completed by correctly remunerated tradespeople and ethical treatment of suppliers and contractors. It would also be an opportunity to ensure minimum thresholds for use of Australian made components, apprenticeship ratios (not 457s) and inclusion of green technologies. 
The actual dwellings, though brand new, are basic; a two bedroom villa with a small yard and a single garage, or an equivalent unit. This is an opportunity for people to enter the world of property ownership, on an equal base level.
 
They would also likely be located in outer suburbs, particularly in cities like Sydney and Melbourne. If that is not where you want to start in the market, the current options remain available. 
If the dwelling costs $350 000 to develop, that would then be the sale price, as there would be no agent’s fees or Stamp Duty under this scheme. The First Home Owner’s Grant would not be available. 
 
In this example, the first home buyer (FHB) signs to purchase half of the dwelling for $175k. The other half is owned by the Government. Repayments are calculated as a 10 years principal and interest loan over the term, with the indicative interest rate. In the example above, the FHB would have weekly repayments of $428 per week (at 5%). After the 10 years have passed, the FHB will have repaid the loan in full, so they will have $175 000 in equity plus a 50% stake in whatever the capital appreciation of the dwelling would have been. In other words, they will have a sizable deposit on their next purchase in the open market.
 
You’re right, there are a few catches 
 
This scheme is exceptionally generous, many will say far too generous. Remember, it is a concept and I’d welcome your contribution as to how to modify it. Having said that, there are a number of conditions I would impose on the scheme:
 
At the end of 10 years, the property is sold to the government. It is then allocated as community housing for the next 10 years until the site is again redeveloped and the cycle begins again. 
 
A 5% deposit is required but a 5 year clean credit rating history is essential.
 
The scheme is open only to Australian Citizens buying their first home and who meet the above criteria.  
 
If the FHB wishes to sell prior to the 10 years, the property must be sold to another FHB as essentially an assignment of the agreement for the remainder of the 10 year term. Stamp Duty is applicable on the 50% share but payable by the vendor. Essentially, this is an early termination fee and designed to reduce “market speculation”, but allow a safety valve in cases of severe hardship.
 
The sale price is calculated by multiplying the purchase price by the average growth of the area over the ten year period, as measured by a source such as RP Data. At sale time the property becomes the property of the government and is designated as future Community Housing, thus ensuring an ongoing supply of relatively new, high quality housing.
 
This scheme is only available to owner-occupier purchases with severe penalties for those found to be in breach. 
 
At the conclusion of the transaction, the super fund’s capital is returned to the DAF to be used in other investments. As with other bond type investment, the full capital has been guaranteed and the return has been received via the interest dividends paid for the life of the bond.
 
How does this benefit Australia?
 
As a result of instituting this strategy, there would be a number of consequences. Many will see positives and negatives. Perspective is interesting like that. 
 
For too long we have run our domestic economy largely on the notion that we can essentially sell the same houses to one another, at ever increasing prices. This is insane and one of the many reasons we are in the situation we are currently in. 
 
The scheme outlined above would result in a direct increase in the level of property ownership. There would be an increased demand for workers in the building and construction sector, as well as their suppliers. There would also be increased retail demand due to more people with jobs spending their wages, less reliance on social security due to people working and having saved for their retirements into the future as well as demand for professional services such as accountants, financial planners and lawyers. I am sure there are also many more professions you could list.
 
There would be a massive shift towards more green technologies and the resultant investment in further development of the sector. There would also be - into the future - a guarantee that we could house the most in need in decent quality, relatively new accommodation, as part of our Public Housing programmes.
 
At the same time, there would be a structural change forced on our economy. Negative gearing immediately becomes far less attractive, as a significantly greater proportion of people are able to leave the rental market and join the property ownership class; less renters, higher vacancies, lower returns, less people wanting to gear. Simple.
 
Superannuation investment will probably increase as a direct result, as investors seek out tax effective replacement vehicles. That would result in greater levels of money into DAF 
There will come a time when the amount of money that is required to provide FHB housing is far lower than the value of the Fund. There is no reason why the investments at that stage could not be used to  fund major infrastructure projects, purchase the vast tracts of land we currently seem intent on selling to overseas investors, provide loans for other Sovereign Nations and the like.
 
Remember, this is a concept, not a blueprint. The finer details can be nutted out by those more knowledgeable and experienced in creating schemes like this than me. There are also many other issues to be addressed, with international speculation in our property market, being one of the major ones but this is enough from me for today
 
Now, here’s the thing. I am not entirely convinced the majority actually want housing to be more affordable. The reality to that equation is that their net worth may also be reduced, both in terms of negatively geared properties held, and perhaps even the value of the family home. Maybe I am wrong. If I am, we should get behind something like this.
 
by bill b
"Often wonders what happened
to the Australia he loves"
@giddyupbill
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