Saving the housing dream - 2nd September 2008
Scott Pape - The Barefoot Investor - Herald -Sun
TABLOID TV shows have a standard story they trot out when interest rates rise: head out to the 'burbs and film some battlers living on struggle street.
Rarely do they stop by a retirement home and catch the oldies celebrating their jump in income (who, let's face it, are their core demographic anyway).
In the advertisement breaks this week the Commonwealth Bank bombarded us with its latest $50 million campaign, which no doubt many an overpaid Porsche-driving ponytail pored over. This time round it's telling us it is "determined to be different" while predictably raising its rates higher than the Reserve Bank's rise. Nice.
Given that tabloid TV is the same six stories over and over with different pictures, the "out of control teenagers" chestnut could have been easily changed, last minute, to "how K-Rudd is helping baby boomers finally get rid of their kids".
While the prime minister looked a little like Britney Spears after a bender at the rate hike press conference, it didn't stop him trying to put a positive spin on things. The introduction of First Home Saver Accounts would assist the growing number of young people priced out of the property market - or so went the spin.
The last federal policy to address this issue was in July 2000, when the first homebuyer's grant was introduced. This probably looked good on a whiteboard in Canberra, but it turned out to be a disaster in real life.
When governments attempt to mess with the market things invariably go pear-shaped, and the FHBG simply served as a shot in the arm for property investors.
The Economist magazine calls the worldwide increase in house prices "the biggest asset bubble in history". I've long argued that diverting more of our tax dollars to the property market is only going to make the situation worse. The market will eventually sort out the affordability issue - a good example can be found in the US right now with the disastrous sub-prime crash.
Despite the best intentions of governments to make housing more affordable, Australian homes ranked as the least affordable of an international survey released late last month.
Peter Thornhill of Motivated Money succinctly summarised the situation when he asked: "When has throwing a heap of money at something ever made it cheaper?"
So in light of all this I wasn't expecting too much as I perused the new policy from the new government.
One thing that immediately stuck out like a sore thumb was the use of the term "saving" in the naming of the policy - I haven't heard that used in any official capacity since 1991.
Yet rather than targeting spending as the FHBG did, the FHSA rewards first home savers for developing a long-term savings plan. In an era of 100 per cent home loans, focusing on accumulating adequate savings before entering into the biggest purchase of your life has Barefoot grinning from ear to ear.
Here's how it works:
As long as you're 18 and are eligible for the FHBG you can open a First Home Saver account, which will be offered by most banks and superannuation funds from July 1.
You can invest the proceeds across a multitude of asset classes, just like your super fund.
An initial contribution of $1000 is required and a maximum of $10,000 (indexed) can be deposited into the account in any one year. Anyone can make contributions (family, friends, sugar daddies). Individuals with incomes of up to $80,000 who contribute $5000 to their account receive a government contribution of $750 (the contribution varies for incomes higher than this.
The earnings of the fund are taxed at 15 per cent, rather than your marginal tax rate, and withdrawals are tax-free.
As with superannuation the funds in the FHSA are locked away for a minimum of four years, and they must be used to buy a first home, otherwise they will be rolled into your superannuation and not touched till you're in sandals and socks.
Still with me?
To make it a little clearer, this week I caught up with federal Housing Minister Tanya Plibersek to discuss the FHSA and get her thoughts on the major issues of housing in Australia. Our discussion is available as a podcast from www.heraldsun.com.au.
The Federal Government has been in power for all of eight weeks (just enough time to call its first summit), and the minister is still finding her feet in her newly created portfolio. That aside, she appeared to be genuinely concerned at the high levels of debt that many Australians now find themselves in - a stark contrast to the previous government which simply retorted that we'd never had it so good.
"The great thing about this scheme is that it's a regular savings plan that takes advantage of the wonders of compound interest," Ms Plibersek said.
During our interview we also discussed the influx of cheap and easy credit, and the concern that predatory lenders will be already exploiting the latest rate rise by cold calling families with slippery offers to lower their repayments (and line their own pockets with huge fees and commissions).
Earlier this week research by JP Morgan and Fujitsu Consulting found that some 750,000 homeowners are likely to suffer mortgage stress (defined as contributing more than 35 per cent of your income towards your mortgage) during 2008.
More worryingly, up to 300,000 of these cases are in danger of default, and run the risk of having their homes repossessed.
A big mortgage, rising interest rates and a lack of financial literacy combine to cause much heartache - just ask any overworked, underpaid community based financial counsellor.
Maybe that's why I'm looking forward to the introduction of the FHSA come July 1 - anything that instils the importance of savings at the start of a young adult's life can only be a good thing.
Tread your own path.