The current challenges of housing stress should be front and centre for all government policy, but I am not sure the recent changes to superannuation appreciate the knock on effect.
Property is a long-term investment and superannuation is a long-term saving plan.
So, property investment and superannuation are a beautiful match. It is no surprise many people own investment property in a self-managed superannuation fund (SMSF).
Setting up and managing an SMSF can be costly. Buying and selling property is also costly (about 3-4% of the property’s value). Therefore, setting up a SMSF to buy an investment property is a long-term plan. Ideally you don’t want to switch directions too often.
Changes to top end superannuation balances
While the changes to the tax rates on superannuation announced this week, only directly impact 0.5% or 80,000 people, (with super balances over $3m) it unsettles everyone else. How confident are we that other changes won’t be made to diminish the return of investment property held in or outside a SMSF?
The latest changes won’t trigger a widespread unwinding of property rich SMSF funds, However, given the shifting sands, are people now more or less likely to buy investment property under the tax shelter offered by a SMSF?
If the answer is “less likely”, then over time there will be less investment property available to feed the desperately tight rental market. This places further upward pressure on rent and creates further housing stress.
What is next on the Gov’t list of changes?
As well as the changes to superannuation, the Federal government also released the “Tax Expenditure Statement” this week. This statement detailed tax concessions (aka missed tax opportunities) by sector. It includes “rental deductions” which are tax deductions available to property investors such as interest payments on property investment loans and negative gearing.
Nationally, rental deductions totalled $18 billion in FY 2022. They forecast this to grow to $26 billion by FY 2026.
Political commentators are suggesting this statement provides a menu or target list for future reductions in tax shelters. Like the recent superannuation changes. Any hint of reducing tax shelters for property investors would see an almost instant sell off by investment owners creating a further decline in rental stock and further exacerbate the housing crises.
The government cannot fill the housing gap. Nor should it try. Its best option is to incentivise the market in whatever way it sees appropriate to provide more rental accommodation. The shortage of housing is a combination of social, political, and economic issues.
Housing stress vs job stress
The economic recessions of previous cycles have usually seen high unemployment. However, the current economic headwinds facing Australia may create more housing stress than job stress. We should look an eye on the home front than the work front to understand what is going on in the modern economy.