The Property Puzzle: A Ban That’s More Complicated Than It Looks

The Australian government’s decision to ban self-managed super funds (SMSFs) from borrowing for residential property has sparked a heated debate about its impact on the housing market and state budgets. On the surface, it seems like a straightforward move to curb a perceived risk to the financial system. However, this issue is far more nuanced than meets the eye.

The ban, introduced as part of budget changes to negative gearing and capital gains tax, has already started to have a chilling effect on builders. A survey by the Housing Industry Association found that up to 67% of signed home construction contracts financed by limited recourse loans through SMSFs are likely to be abandoned due to the government policy.

This is not just a minor hiccup in the property market. If these contracts are indeed ditched, it will have far-reaching consequences for state budgets and the housing industry as a whole. The HIA estimates that new home construction could fall by 3.5-5%, resulting in a $450 million hit to GST and stamp duty revenue.

SMSFs, however, are not ordinary investors. They are often wealthy individuals who set up their own superannuation funds, which then borrow money to invest in property. The argument that they don’t create demand for housing is not convincing. While it’s true that they don’t live in homes themselves, they provide capital that finances the construction of new housing.

The government’s case against SMSFs relies on Treasury modelling showing a 35,000 reduction in new home builds due to the ban. However, this ignores the fact that the same modelling predicts a 65,000 increase in homes started due to a $2 billion funding injection for states and councils to build necessary property infrastructure.

By banning SMSFs from borrowing for residential property, the government is effectively reducing one source of investment that has been a key driver of new home construction. However, restricting access to capital will not necessarily solve the problem of affordability. As Housing Industry Association chief economist Tim Reardon points out, SMSFs provide capital that finances the construction of new housing, rather than simply creating demand for existing homes.

The impact of this ban will be felt far beyond just the property market. State budgets will take a hit, and taxpayers will foot the bill. It’s a classic case of unintended consequences. By trying to fix one problem (the perceived risk posed by SMSFs), the government may have created another (a reduction in new home construction and a subsequent hit to state revenue).

The question now is: what next? Will the government revisit its decision and provide a more nuanced approach to regulating SMSFs, or will it stick to its guns and hope that the market adjusts accordingly? One thing’s for sure – this issue won’t be going away anytime soon.

In the end, it’s up to the government to get it right. The property puzzle is complex enough without adding unnecessary obstacles to new home construction. If they really want to address the issue of affordability, they need to think outside the box and come up with creative solutions that don’t simply restrict access to capital. Anything less will be a missed opportunity for Australia’s housing market – and its taxpayers.

The stakes are high, and it’s time for the government to step up and show some leadership on this issue. As Tim Reardon so aptly puts it: “Restricting one source of investment does not reduce the number of Australians needing somewhere to live.”