The Conversation Brendan Coates, Grattan Institute and John Daley, Grattan Institute

Allowing first homebuyers to cash out their super to buy a home is a seductive idea with a long history. Like the nine-headed Hydra, which replaced each severed head with two more, each time the idea is cut down it seems to return even stronger.

Both sides of federal politics took proposals to the 1993 election to let Australians draw down their super. After re-election, then Prime Minister Paul Keating scrapped it amid widespread criticism. Former Treasurer Joe Hockey raised the idea again in March and was roundly criticised by academics and the media. This month the Committee for Economic Development of Australia (CEDA) has again resurrected the idea.

House prices have skyrocketed again over the past two years, particularly in Sydney. So politicians are attracted to any policy that appears to help first homebuyers to build a deposit. Unlike the various first homebuyers’ grants that cost billions each year, letting first homebuyers cash out their super would not hurt the budget bottom line – at least, not in the short term. But the change would worsen housing affordability, leave many people with less to retire on, and cost taxpayers in the long run.

It is a bad idea for five reasons.

First, measures to boost demand for housing, without addressing the well-documented restrictions on supply, do not make housing more affordable. Giving prospective first homebuyers access to their superannuation will help them build a house deposit, but it would worsen affordability for buyers overall. Unless supply increases, more people with deposits would simply bid up the price of existing homes, and the biggest winners would be the people who own them already.

Second, the proposal fails the test of superannuation being used solely to fund an adequate living standard in retirement. The government puts tax concessions on super to help workers provide their own retirement incomes. In return, workers can’t access their superannuation until they reach a certain age without incurring tax penalties.

While paying down a home is an investment, owner-occupiers also benefit from having somewhere to live without paying rent. These benefits that a house provides to the owner-occupier – which economists call housing services – are big, accounting for a sixth of total household consumption in Australia. Using super to buy a home they live in would allow people to consume a significant portion of the value of their superannuation savings as housing services well before they reach retirement.

Third, most first homebuyers who cash out their super would end up with lower overall retirement savings, even after accounting for any extra housing assets. Owner-occupiers give up the rent on their investment. With average gross rental yields sitting between 3% and 5% across major Australian cities, the impact on end retirement savings can be very large. Consequently, owner-occupiers will tend to have lower overall lifetime retirement savings than if the funds were left to compound in a superannuation fund

Frugal homebuyers might maintain the value of their retirement savings if they save all the income they no longer have to pay as rent. In reality, few will have such self-discipline. Compulsory savings through superannuation have led many people to save more than they would otherwise. A recent Reserve Bank study found that each dollar of compulsory super savings added between 70 and 90 cents to total household wealth. If first homebuyers can cash out their super savings early to buy a home that they would have saved for anyway, then many will save less overall.

Fourth, the proposal would hurt government budgets in the long run. Superannuation fund balances are included in the Age Pension assets test. The family home is not. If people funnel some of their super savings into the family home, gaining more home equity but reducing their super fund balance, the government will pay more in pensions in the long-term.

Government would be spared this cost if any home purchased using super were included in the Age Pension assets test, but that would be very hard to implement. For example, do you only include the proportion of the home financed by superannuation? Or would the whole home, including principal repayments made from post-tax income, be included in the assets test? The problems go away if all housing were included in the pension assets test, but this would be a very difficult political reform.

Fifth, early access to super for first homebuyers could make the superannuation system even more unequal than it is today. Many first homebuyers are high-income earners. Allowing them to fund home purchases from concessionally-taxed super would simply add to the many tax mitigation strategies that already abound.

Consider the case of a prospective homebuyer earning A$200,000. Their concessional super contributions are taxed at 15%, rather than at their marginal tax rate of 47%. Once they buy a home, any capital gains that accrue as it appreciates are tax-free, as are the stream of housing services that it provides. Such attractive tax treatment of an investment – more generous than the already highly concessional tax treatment of either superannuation or owner occupied housing – would be prone to massive rorting by high-income earners keen to lower their income tax bills.

What, then, should the federal government do to make housing more affordable?

Prime Minister Malcolm Turnbull has tasked Jamie Briggs with rethinking policy for Australia’s cities. Mick Tsikas/AAP

Helping fix our cities

Above all, new federal Minister for Cities Jamie Briggs should support policies to boost housing supply, especially in the inner and middle ring suburbs of major cities where most people want to live, and which have much better access to the centre of cities where most of the new jobs are being created. The federal government has little control over planning rules, which are administered by state and local governments. But it can use transparent performance reporting, rewards and incentives to stimulate state government action, using the same model as the National Competition Policy reforms of the 1990s.

Other reforms, such as reducing the 50% discount on capital gains tax and tightening negative gearing, would also reduce pressure on house prices and could be implemented straight away. Such favourable tax treatment drives up house prices because it increases the after-tax returns to housing investors. The number of negatively geared individuals doubled in the 10 years after the capital gains tax discount was introduced in 1999. More than 1.2 million Australian taxpayers own a negatively geared property, and they claimed A$14 billion in net rental losses in 2011-12.

There are no quick fixes to housing affordability in Australia. Yet any government that can solve the problem by boosting housing supply in inner and middle suburbs, while refraining from further measures to boost demand, will almost certainly find itself rewarded, by voters and by history.

Brendan Coates, Senior Associate, Grattan Institute and John Daley, Chief Executive Officer , Grattan Institute

This article was originally published on The Conversation. Read the original article.

Wednesday, 30 September 2015 01:19

A Tale of Two Chinas

Written by

Nike surprised the market last week with a 30% increase in Chinese sales. The resulting 8.6% weekly share price rise took the gain for 2015 so far to 30.0%. The Nike market performance (shown in yellow in chart below) has been the mirror image of the Caterpillar outcome (shown in blue). Last week, the Caterpillar share price fell another 9.6% to bring to 29.0% the fall during 2015.

The performance differential signals that the long-awaited pay-off for companies positioned to take advantage of the growth of Chinese consumption is becoming meaningful. The maturation of the Chinese economy will increasingly undermine macro-themed generalisations about Chinese exposure.

Forecasting GDP movements, which may have contributed to investment success in the past, will have lost some potency as strategic business positioning becomes a more important determinant of investment outcomes.

(Sourced from EIM Capital Managers)

Sunday, 30 August 2015 22:35

Why have the banks corrected recently?

Written by

Banks have been top performers before correcting

The banks represent a large portion of Australia’s share market. The ’big four’ banks have been top global performers (in local currency terms) and a very large driver of our stock market rally particularly since the Euro-crisis days of 2012. All four major banks have outperformed the index. For the past three years rates have been falling and are now at all-time lows, so the banks were able to grow their mortgage books at the same time as problem loans dissipated due in part to these lower rates. As a result, the profits of the ’big four’ have doubled from 2008 levels. This has led to a sustained, steady rise in stock prices, bank profits and a growing stream of dividends.

Since their recent reporting season, all our major banks have run into a volatile patch with the sector giving back much of its year-to-date gains. The market has been underwhelmed by the financial results delivered by the banks in May and now in August. With all of the banks increasing their capital by issuing shares the dilution could signal the end of their record profits and dividends.

Why have they given back gains?

Many of the drivers of that growth in profitability and earnings are now slowing and this will lead to some contraction in valuations.

One driver has been cost reduction. Banks have kept a keen eye on costs over this period by capping the growth in employees and implementing productivity and cost-out initiatives. This has led to what the banks call ’positive jaws’, which basically means an increase in profit margins. But cost pressures are re-asserting themselves, meaning this area of margin expansion may be more difficult to achieve going forward.

Another big driver of profits has been the release of balance sheet provisions for bad and doubtful debts. These are reserves the banks hold against loans that are in arrears or at risk of impairment. As interest rates plummeted to all-time lows, these problem loans started to improve to such an extent that the banks are obliged by accounting standards to release those reserves to profits. But with the provisioning for these loans now below pre-GFC levels, they represent a one-off profit driver which may reverse if the cycle weakens. So while profits should still grow this year, some of the factors that were driving these profits are starting to run their course. In the recent reports and updates in August we have seen some slight tick up in provisions, which implies that this trend is unlikely to contribute to profits going forward and may impair growth if the economy softens.

Bank shares have given back some of their large gains

Source: AMP Capital and Bloomberg

Final thoughts

While profits are at all-time highs, earnings growth is slowing and with high starting valuations the banks have come under pressure. Together with industry regulation to increase capital and reduce lending within the investment mortgage market, a more subdued outlook for bank profits is expected along with more challenging times ahead for shareholders as returns on equity moderate.

As banks make up a large part of the Australian share index, most investors will hold these stocks. While banks have recently given back some of their gains made over the past year, they still provide attractive dividends which are an important feature in a yield-starved world.

Tuesday, 25 August 2015 20:47

The rise of middle class in Asia

Written by

Investors should pay heed to changing demographic trends as a clue for future potential growth opportunities.   There would seem no greater demographic shift taking place right now, than the rising of the Asian middle class.  The chart below (sourced from the Financial Review) shows the growth in Asian middle class between now and 2030.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investors should ask themselves what changes take place in a person's life as they earn more and build wealth?  How does their diet change?  Once basic needs such as food and shelter are provided for, what do people with more disposable income spend money on? 

We have sourced some interesting statistics from a presentation we hosted with Platinum Asset Management that highlight some interesting spending habits taking place in China in 2014.

 

1. 32 million passengers flying per month

2. 640 million internet users

3. 25 million motor vehicles sold

4. $5bn in box office revenue at the movies

5. 14bn e-commerce parcels delivered

 

When looking at these numbers from a place like Australia with a population of around 23 million, it is difficult to get your ahead around the sheer size of the opportunity at hand.

There are large demographic shifts taking place in middle class in Asia - how is your investment strategy positioned to profit from this?

 

Last week's sell off in share markets, prompts many investors to ask ..... what next?

History has a habit of repeating itself so it is with this in mind that we sourced a table from Bloomberg recently that shows the market movements following a 5% weekly fall.

It's interesting that 7 out of ten times, the market has been higher, 3 months after a weekly fall of 5%.

The occasions when the market was not higher 3 months after a sharp weekly fall, was during times of a systemic market problem (such as Lehmann Brothers bankruptcy in 2008).  So investors need to ask themselves whether or not current events are likely to result in systemic failure in the financial system.  If not, then history suggests that in the majority of occasions, markets will be higher in 3 months.

The table below refers to the US share market.

 

Mark Draper (GEM Capital) spoke recently with Andrew Clifford (Chief Investment Officer - Platinum Asset Management) about the recent volatility in the Chinese share market.


Andrew provides some perspective on what is going on at the moment, and why he continues to believe in the medium term benefit of investing in China.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

China’s Share Market, Dangers Signs or Opportunity?

Mark Draper: Andrew, the Chinese Share Market has had a pretty interesting run over the last, really 5 years. It has come up from a low base and then we have had a pretty significant correction in recent times. Is this the beginning of the 1929 saga as it been regularly put forward the media or are you able to put some perspective for us?

Andrew Clifford: I think you just need to step back a bit and see where the run-up in this market began. If you go back 18 months ago the market was down 65% over the previous seven or so years which really makes it one of the great bear markets of history. There are not many bear markets that were going down that far for that length of time and so you know what started to happen was that there was some sense that policy was going to be eased particularly around lending restrictions over in the market, and as markets do when they sort of see that, took off on a great run. Now undoubtedly parts of the market became very speculative. They were very much driven by individual investors, lots of margin debt and it all fell apart. Now the government interferences were really not being helpful but if we step back and think about the longer term these Chinese A shares, it is very interesting that it is a market where there’s very little institutional investment . Over a longer period of time payers like pension funds and insurance companies have minimal, if any exposure to shares and it’s not likely to be the case five years down the track. There are fears the government will have to liquidate this rescue fund they put together. Indeed they should have had the rescue fund but the long history of these rescue funds and there being many in 1987 in Hong Kong and 1997 a number of countries across the region, indeed I think in 2001 we also had them and you know the governments have a very strong staying power. In the order of forty or fifty billion dollars of stock bought. Well perhaps it sounds like a big number but in the context of the Chinese government it’s not really, it’s a very large economy. So we think as investors people get too excited about these day to day moves, for us we’ve got some great companies, some of them listed in the A share market in China. The really good companies actually haven’t come off that much then, more of the order of 15 or 20 percent rather than the very dramatic falls and the more speculative parts of the market and indeed for us that just an opportunity to buy some more of these companies.

Mark Draper: So you’re really saying that normal market function, it comes off a low base and really some investment opportunity rather than something very ...

Andrew Clifford: Essentially it’s a little more wild than your average market but that’s what happens when as it is today 80 percent of investments are retail investors but through time, for the moment that’s actually the opportunity for longer term buyers and over time I think that will change.

Mark Draper: Andrew, thanks very much for your time.

Andrew Clifford: Yeah, thank you.

Monday, 24 August 2015 09:59

China's Property Market - is it about to crash?

Written by

We recently met with Andrew Clifford (Chief Investment Officer - Platinum Asset Management) and asked him whether he thinks the Chinese property market is about to crash.

Andrew puts perspective on the Chinese property market in the video below.  A full transcript follows.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

China’s Property Market, Is It About To Crash? Transcript

Mark Draper: Andrew, a lot of talk in Australian media at the moment about the Chinese Property Market which is important to Australia as a flow on and domino effect. Are we about to see a Chinese Property Market crash or where is the property market at there?

Andrew Clifford : Yeah, we’re not so concerned about the residential market in China. There are a few things we’d look at. Certainly there’s always a talk about the Ghost Cities and some of those certainly do exist but if you look at the broader context, there are reasons to be not so negative. Let’s say. So lets look at some of the numbers. So since we started private ownership of property commenced in 1999 in China, we’ve probably built about the order of one hundred million apartments since then. So if you think about it that, that represents the entire modern housing stock of China. So that leads a few hundred million households still living in communist housing, not that pleasant perhaps. Now maybe a question about affordability is indeed very significant latent demand for residential property and we expect that to be a significant part of this economy for some time to come. In terms of prices whether they’re too high or not, one of the things we’d look at is the development of the secondary market in property and in the big cities now as much as 40% of the turnover on property is the secondary market where you have individual owner selling to an individual buyer. And interestingly we’ve got a market here where there is millions of apartments turning over and prices are only down by a few percent from the highs, eighteen months ago.

Mark Draper: And the activity is actually trending up in tier one or tier two cities.

Andrew Clifford: So indeed, so when we look at the inventories and unsold inventories they’re not really that significant and those cities now, they’re going to be with the ghost cities, they’re going to tier three and four cities. Population growth is muted whereas in the big cities populations are growing at 3 or 4 percent so really again this underpins the demand here. I think also in terms of, you know, lets look at how big this market was and you know people get afraid because the numbers are big so we would probably at the peak building twelve million apartments but again what I would tell you is on a population adjusted basis is not very different to what we’re building in Australia today.

Mark Draper: Right.

Andrew Clifford: Perhaps that tells you more about Australia than China but the thing is that ,again, look there will be developers who will go bust because they’ve got bad developments there will be bad loans coming out of the industry but we don’t think it is a completely dire situation as it gets painted often in the paper.

Mark Draper: Thank you very much for your insights, Andrew. That’s really good information.

Andrew Clifford: Thank you.

Friday, 21 August 2015 00:35

$AUD - Lower for longer

Written by

We recently met with Andrew Clifford (Chief Investment Officer - Platinum Asset Management) to ask him where he believes the $AUD is heading in the medium term.

 

Following the video is a transcript of the conversation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mark Draper: Andrew, Aussie Dollar 74 cents, where do you think it’s going on a three to five year view?

Andrew Clifford: So we certainly think that, I guess it has become a fairly consensus view that the Australian Dollar can go a lot lower and we genuinely think that remains the case and it really just comes down to competitiveness that when we look particularly at labour cost it costs the range of industries, Australia just isn’t competitive now particularly with other develop markets, developed economies like Japan, Europe or the US. So we really think there is a lot more room for it to go lower. What I would caution though is that there are some positives remain, we are still one of the few developed economies which hasn’t seen our central bank print money with responds to housing or banking crisis so that is in our favour and it is the very fact that I said there are now many people who want to predict that the currency is going a lot lower would tend to make one cautious whenever you see that as investors we are all getting into the one position. So I suspect that at some point here we will actually shorter term not that such predictions are worth that much but I think that there is a real chance that the Aussie Dollar will go significantly higher before we actually see a further depreciation and what might cause that? I think simply any set of events that make people less concerned about, the prospects in China that the place will not have a very nasty or depression like term and it actually will come true this safely or indeed any sense that your representing a bit of this position. That general view of global growth I think will make people more comfortable owning the Australian Dollar in a short term since.

Mark Draper: And a medium term sense still comfortable ...

Andrew Clifford: And certainly we think Australian investors, while they have a little more exposure to off shore markets today then they have had, we still think that there’s are many people sitting there going oh well the Aussie Dollar’s already fallen a long way, that’s probably over and what we would think is on a medium to longer term, there is some way to go.

Mark Draper: Andrew, thanks for your thoughts. Much appreciated.

Andrew Clifford: Yeah, thank you.

 

 

Tuesday, 28 July 2015 13:30

Understanding the Chinese Sharemarket in Charts

Written by

With the surge in volatility in the Chinese share market - we have sourced a collection of charts that puts the Chinese share market into perspective.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Chinese share market trading is dominated by retail investors, which is the opposite of Western markets, where institutions dominate trading.