Welcome Guest [Log In] [Register]


Reply
It's hard to think of a more distorted market - empty nesters locked up with their money
Topic Started: 3 Sep 2014, 03:39 PM (398 Views)
Admin
Member Avatar
Administrator

Quote:
 
Empty-nesters locked up with their money

Rob Burgess
2 Sep, 6:47 AM

The still-booming house price figures released by RP Data yesterday will be welcomed by the thousands of investors who have piled into the market in past months.

The survey showed prices up 4.2 per cent nationally in the three months to August, with Melbourne at 6.4 per cent and Sydney at 5 per cent.

It's not only investors that will be happy. Many home owners see their primary residence as a buffer against hard times, a source of equity withdrawal when money for new projects is required and as a large bequest to the next generation -- usually their offspring.

Parents often say they want to leave their children better off then they themselves were, and traditionally the capital gains tax-free primary residence was the main vehicle for passing wealth between generations.

However this pattern looks set to change. There is a growing tension in the economy between a generation holding housing assets 'for their children' and the same generation's increasing demand for pension, health care and services that are funded by taxes paid by those same 'children'.

To illustrate the point, the Productivity Commission last November prepared a chart showing the divergence between house prices, health costs and inflation (see below).

Posted Image

For the children of retiring baby boomers, then, a perverse situation is arising in which it looks impossible for the federal government to deliver tax relief to families while balancing the budget at the same time.

In fact the Abbott government is making life tougher for many young families, accompanied by the message 'the age of entitlement is over'.

However many young taxpayers are aware that their parents are sitting on large fortunes, locked up as housing wealth, that will be theirs in 30 years' time.

That, to paraphrase a vivid colloquial description, is a sandwich with a pungent and unappetising filling.

In effect, the message is: work hard and pay extra tax while your children are young, and be rich when your bones ache too much to enjoy the money.

The problem is being repeated throughout the developed world, according to a study released on Friday by The New Zealand Institute, a think tank led by long-time Business Spectator columnist Oliver Marc Hartwich.

The report, entitled 'Empty nests, crowded houses', argues that around the world the housing market is one of the most distorted markets there is.

The types of dwellings built, and their locations, are determined by planning authorities who are often out of step with the needs of the people who will occupy the homes they approve.

And worse, tax and retirement savings laws usually distort the market even further.

In the UK market, for instance, the ageing population features an ever-increasing population of 'empty nesters' who, even if they wished to find smaller, more appropriate dwellings, face a series of obstacles that make it all too hard.

The report notes: "The current UK housing affordability crisis is not principally because of a lack of housing, but the way the tax system has created perverse incentives.

"The tax system encourages under-occupation of housing. What is needed is a tax system that better balances income taxes and wealth-related taxes, and reflects the social costs of the over-consumption of housing."

That problem is mirrored in Australia, but is a difficult area of public policy to confront as any attempt to do so is greeted with "it's my money, and I'll live in any house I choose!"

Quite right. This author, like most Australians, reserves the right to do 'irrational' things with his money. (Just last week I bought a kelpie.)

But policy that forces empty-nesters out of their homes is not the issue -- 'forcing' people to stay in large dwellings is what the New Zealand study is more concerned with.

Given the sustained house-price run-up of the past 20 years, many retirees now find themselves in homes worth, say, $700,000.

While that money sits there, it is a giant nest egg to bequeath to the next generation, and its capital gains are tax-free.

Moreover, if the home owner has only modest other assets, including modest superannuation income, the value of that home will not affect their right to claim a pension from the government.

Meanwhile, down the street, a family of four might be squeezed into a two-bedroom townhouse worth $500,000.

However, if the retirees wished to sell up and move to a similar townhouse, $200,000 of their assets would now be back in play -- reducing their pension income, and possibly incurring a tax liability.

So let's be clear. Avid gardener Granny Smith has a perfect right to stay in her large home, with a large garden, if that's what she wants. But Granny Jones next door, who hates gardening and maintaining a large house, may be kept in situ by the "perverse incentives" that the NZ study discusses.

As the Productivity Commission put in a report last November: "The treatment of home assets in pension eligibility tests and the barriers to accessing home equity (particularly transactions costs, such as stamp duty on property) are likely to play a major role in this pattern."

This is an area of policy reform that is moving far too slowly.

The PC report examined the "evidence on the viability of one possible avenue for funding age-related costs -- tapping the otherwise inactive wealth held in the housing assets of older Australians" and made politically cautious statement that "while the adoption of such a policy approach is currently over-the-horizon, it is nevertheless worth deeper consideration".

One serious issue that will arise when (or if) a federal government has the courage to tackle this problem is the effect it will have on the value of larger homes. An increased number of large homes offered for sale could dent the value of those homes.

That's bad news for the size of the bequest Granny Smith leaves to her descendants, but good news for families living in crowded houses.

Viewed from another perspective, many young families will wonder why their taxes fund a pension for Granny Smith, whose only major asset is the family home, when all the capital gains tax forgone on that asset will flow to her descendants.

There was a lot of debate in the media last week about superannuation tax concessions that are worth about $30-$40 billion to the federal budget before offsetting pension savings are taken into account.

But that major 'tax expenditure', as it is known, is the smaller part of the total 'tax expenditures' figure in the budget. The Productivity Commission report notes: "Tax expenditures represented $111bn in forgone revenue in 2011-12 (Treasury 2013), of which tax concessions on housing and superannuation are the most important."

It really is hard to think of a more distorted market. The political pressure to reduce the 'perverse incentives' in housing will only build until governments act.

Read more: http://www.businessspectator.com.au/article/2014/9/2/politics/empty-nesters-locked-their-money
Follow OzPropertyForum on Twitter | Like APF on Facebook | Circle APF on Google+
Profile "REPLY WITH QUOTE" Go to top
 
vdmruss
Member Avatar


http://australianpropertyforum.com/topic/10155307/1/

Force people to sell their assets to feed themselves. It's capitalism, after all. :re:

P.S. It has to be done before "Granny Smiths" start finding themselves burglarized.

Edited by vdmruss, 3 Sep 2014, 03:53 PM.
Let me assure you that this isn't one of those shady pyramid schemes that you've been hearing about. No sir, our model is the Trapezoid which guarantees each investor an 800% return within hours.
Those who can, do. Those who can't, teach.
"It's an itchy blanket, it's designed to remind you how lucky you are"
Profile "REPLY WITH QUOTE" Go to top
 
ThePauk
Member Avatar
Diamond Member
Simples....
The pension asset test included the first $500k VG amount towards the pension and reverse mortgage provided by Centrelink as an extension of the current Pension Loan Scheme, which is in place now.
Profile "REPLY WITH QUOTE" Go to top
 
1 user reading this topic (1 Guest and 0 Anonymous)
« Previous Topic · Australian Property Forum · Next Topic »
Reply



Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.

Forum Rules: The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.

Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.

Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.

This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.

For more information go to Limitations on Exclusive Rights: Fair Use

Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ

Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy