Super reforms: Equity reset, or countdown to a housing nightmare?

It is likely the super reforms will lead to a resurgence of interest in residential property investing, particularly for those above or in danger of reaching the new threshold. Picture: Darren Leigh Roberts

Superannuation reform is currently dominating public debate, but too little attention is being paid to how this reform may affect other parts of the economy – and especially housing.

The proposed changes assume holders of super accounts with balances over $3m – already more than 50,000 of them and growing as the economy rebounds – will quietly accept a higher tax rate and won’t adjust their investment strategies.

But superannuation is part of a complex system; even relatively small changes to tax settings trigger adjustments elsewhere. And in the contemporary economy, nothing is more fluid or elusive than capital.

Australians have a strong interest in both the housing market and their retirement incomes. As a nation, we have long obsessed about home ownership, and that preoccupation has become even greater as house prices have spiralled over recent decades, creating investments for some and very expensive housing for others.

There is a danger that reforming superannuation without making equivalent changes elsewhere in the tax system could encourage these wealth holders to switch over to other investment vehicles that also bring tax advantages.

Housing would be a likely choice for many. House prices have risen sharply and then fallen. Further price rises are likely – especially as immigration rates increase – and being a landlord carries with it both the prospect of capital gains, which are taxed at half an individual’s marginal rate, as well as negative gearing. And let’s be honest, Australians with high super balances will have higher incomes, access to tax advice and an inclination to use their assets astutely.

Put simply, they are the Australians least likely to adopt a passive or “invest and forget” strategy. There will be a quiet rush as they seek alternatives to paying higher taxes on ­future superannuation earnings.

It is likely the super reforms will lead to a resurgence of interest in residential property investing, particularly for those above or in danger of reaching the new threshold. They will not continue to direct their money into an investment with much diminished tax advantages. This is how investment and capital markets work.

But this isn’t an issue for just those wealthy individuals, or the Tax Office, or even policy makers. It’s something that could affect far too many vulnerable Australians, especially those who are struggling to get a toehold in the market.

Renewed investment will push up housing costs in the top end of the market as high wealth, high income investors seek properties with better prospects of capital gains, with inevitable trickle-down impacts on other parts of the market. First-home buyers will be crowded out, and the home building industry will once again experience skills and materials shortages.

The pandemic and the associated lockdown once again reminded Australians that housing markets are volatile and difficult to predict. But we know with certainty that surges of capital flight or entry create difficulty, shocking an already vulnerable system. Widespread predictions of a steep fall in housing prices early in the pandemic did not come to pass, largely due to income support policies and record low interest rates.

As a nation, we also welcomed back around 400,000 expats, many of whom returned to occupy properties they previously rented out. Others took the opportunity to buy into the Australian housing market, something they had not planned to do for years to come. HomeBuilder and enhanced first homeowner grants in some parts of the country resulted in a stressed and precarious construction sector.

Policy makers and industry experts have long known housing reacts to changes in financing and tax arrangements. John Howard’s new tax regime introduced in 2000 raised housing prices by providing stronger tax breaks for landlords. Similarly, governments at all levels now accept that first-home owner schemes lift prices by encouraging buyers to buy now not later, thereby contributing to price bubbles. With the benefit of hindsight, stimulatory policies such as HomeBuilder have triggered building industry volatility, higher labour and material costs. In too many instances it has led to bankruptcies.

The result has been plummeting rental vacancy rates and rents rising at a near record pace. Change in one part of the housing system affects every other part of the market.

Housing and the finance sector shape each other.

But superannuation doesn’t have to be the ogre in this story. Increasingly, superannuation funds are using their assets to generate positive social outcomes – things all Australians would welcome – such as affordable housing. As a nation we should be looking to accelerate that trend through regulatory reform or a tightening of corporate focus on “social good” aspirations.

Change to superannuation now appears inevitable, but it may not be too late to make sure the new ­policy settings work to boost productivity and create a fairer and better Australia.

Professor Andrew Beer is Executive Dean of UniSA Business at the University of South Australia. Chris Leishman is Professor of Property and Housing Economics at the University of South Australia. Emma Baker is Professor of Housing Research at the University of Adelaide. The authors are founding members of the Mayfair Group.