Less wealthy Aussies vulnerable to house price collapse

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Less affluent Australians have the most to lose if house prices collapse and cause an economic downturn, warned Shadow Treasurer Chris Bowen.

Bowen made the comment in a speech to the McKell Institute last Wednesday, warning that rapid house price growth and record levels of mortgage debt were issues of financial stability, not just of social justice.

A special Newspoll conducted exclusively for The Australian last month found that 54% of voters support reforms to negative gearing and capital gains tax for investors. However, 49% of voters oppose using superannuation to fund house deposits for first-home purchases.

Bowen said it was “nonsense” to allow the free market to “rip into housing” because that sector was already heavily impacted by government regulation every day through “the most generous property investment tax concessions in the world, the regulation of superannuation investments in property, foreign investment rules, infrastructure spending, state and local planning regulations”.

House prices have risen by nearly 20% in Sydney in just 12 months, according to the latest data from CoreLogic. This places the Harbour City at the forefront of a robust nationwide average increase of 12.9%.

The Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) have sounded warnings about the rampant growth in investor loans, high levels of household debt, and various risks to the nation’s financial stability.

Bowen said that it wasn’t the government’s role to dictate how households and businesses borrowed or invested, but that it had the responsibility not to “adversely distort economic decision-making.”

“If Australia faced the unfortunate scenario of an economic shock down the track, a responsible government would be able to tell the Australian people they did everything in their power to prevent a situation being worse than it could otherwise have been,” Bowen said. “The current government would simply be unable to do this.”

Bowen said the economic downturn would not be shared equally by all households, as it would be less affluent households that would feel the brunt of the economic aftershocks. “People of wealth can and usually do diversify their portfolio, spreading their risk. People of less wealth tend to have most or all of that wealth tied up in the family home, and thus be particularly vulnerable to shocks.”

Bowen noted that the Murray financial inquiry had endorsed reforms to negative gearing and capital gains tax concessions, as well as a ban on direct borrowing by self-managed superannuation funds.

Assistant Treasurer Michael Sukkar responded to Bowen’s speech by demanding that Labor provide economic modeling to demonstrate the effect of its negative gearing policy on housing affordability and the rental market. Sukkar further argued that the McKell Institute had found it was housing supply that played the biggest factor in determining affordability.

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