Why the home ownership dream is slipping away for many Australians: Gottliebsen

Don’t look at the Cup Day interest rate rise in isolation. It is what is happening around the interest rate increase that locks us into a nation-changing situation. All Australians will be affected.

The first part of the nation changing actually happened eight days earlier when, on October 26, deputy commissioner of taxation Neil Olesen wrote to those putting large amounts into superannuation alerting them to the fact that those aged under 50 can only put $25,000 into superannuation each year.

You may wonder why that’s important now, when Treasurer Wayne Swan announced this limit in the May Budget. The reason is simply because there is nothing like a letter from the tax office to focus the mind on the issue and start strategic change.

What the deputy commissioner is telling people aged under 50 on high incomes, is that superannuation now is merely an add-on savings mechanism. It might look attractive, but you can’t use it as a major savings vehicle unless you are prepared to pay the tax on your income and then invest in super without a tax deduction. The under 50s people I know on high incomes are now looking at non-superannuation capital accumulation options.

Then a few days later Meriton chief and the largest owner and developer of apartments in Sydney, Harry Triguboff, emailed me and others with a startling conclusion – higher interest rates are more likely to put long-term dwelling prices up rather than down (Rate rises may backfire, November 2).

Then came the widely predicted 0.25% interest rate rise, along with the clear indication that there is more to come. In isolation it shows the strong position of Australia, as Stephen Bartholomeusz explained yesterday. On its own that interest rate rise is not going to affect dwelling values, but another 50 basis points will have a significant effect on many home buyers and owners with large mortgages.

On their own these events will not change national savings patterns, but if we take a step back it’s suddenly clear why the landscape is likely to change dramatically. The Triguboff argument is that higher interest rates will slow down the rate of building construction at a time when the population is rising dramatically. That means that we are building up an even greater long-term housing shortage – a powder keg which after seven relatively stagnant years is set to explode. The trigger is likely to be pulled by Treasurer Wayne Swan who has slashed the amount people can invest tax effectively in superannuation. Many will swing back to highly leveraged dwellings.

As investors return to the residential market, prices will edge up and home ownership will become tougher and tougher in most areas of Australia. In some cities such as Melbourne enormous amounts of new land is being brought onto the market and this may hold back values to some degree. Nevertheless the investor demand will be very strong.

My guess is that once the Government wakes up to what is happening they will curb the interest deductibility rules, but that will create even greater shortages.

Few countries have a higher home ownership rate than Australia. Over the next five years the events of the last two weeks have set us on a course that will reduce the home ownership proportion and residential renting will become greater. That’s a nation-changing event.

This article first appeared on Business Spectator.