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investment opportunity

Housing market an economic risk

With numerous reports identifying record levels of mortgage debt, coupled together with credit and household debt generally at record levels, Australia is facing a very real risk of an economic downturn.

While the wealthy have diversified portfolios, the average aussie homeowner has likely put everything into the house.

Putting all your eggs in one basket is risky, but for many the equity should still remain.

The key, as always, is to regularly review your finances and budget, ensure you take professional advice and prepare for any economic downturn.

The less wealthy will bear the brunt of any house price collapse and it is up to politicians to mitigate that risk, Chris Bowen says.

Less wealthy Australians have the most to lose if house prices collapse and cause an economic downturn, the shadow treasurer, Chris Bowen, has warned.

Bowen made the comments in a speech to the McKell Institute on Wednesday warning that rapid house price growth and record levels of mortgage debt were issues of financial stability, not just of fairness and equity.

Newspoll has found that a majority of voters support curbing negative gearing and reducing capital gains tax concessions for investors, but more people oppose using superannuation for a house deposit than support it.

Bowen said it was “nonsense” to allow the free market “to rip into housing” because the sector was already heavily impacted by government regulation.

Government affected housing affordability “every day” through “the most generous property investment tax concessions in the world, the regulation of superannuation investments in property, foreign investment rules, infrastructure spending, state and local planning regulations”.

House prices have risen in Sydney by almost 20% in just 12 months, putting it at the forefront of a robust nationwide average increase of 12.9%.

Regulators including the Reserve Bank of Australia and the Australian Prudential Regulation Authority have sounded warnings about the growth in investor loans, high levels of indebtedness and the risk to financial stability.

Bowen said it was not the government’s role to dictate how households and businesses borrowed or invested but it had a responsibility not to “adversely distort economic decision making”.

“If Australia faced the unfortunate scenario of an economic shock down the track, a responsible government would be able to tell the Australian people they did everything in their power to prevent a situation being worse than it could otherwise have been.

“The current government would simply be unable to do this.”

Bowen argued that economic pain would not be shared equally in Australia, as “a property-based economic shock would impact on those who can least afford it”.

“People of wealth can and usually do diversify their portfolio, spreading their risk.

“People of less wealth tend to have most or all of that wealth tied up in the family home, and thus be particularly vulnerable to shocks.”

Bowen noted that the Murray financial inquiry had backed reforms to negative gearing and capital gains tax concessions and a prohibition on direct borrowing by self-managed superannuation funds, one of the measures Labor adopted last week.

The latest Newspoll, released on Wednesday, found that 54% supported reducing investor tax breaks to make housing more affordable, compared with 28% who opposed it and 18% undecided. Coalition voters also backed the plan, with 52% in favour and 35% opposed.

The proposal to allow first home buyers to dip into their superannuation, which senior Coalition figures were divided on before it was effectively ruled out by Malcolm Turnbull, was not nearly as popular.

A total of 49% opposed using super for a house deposit, compared with 42% who supported it and 9% who were uncommitted.

The assistant treasurer, Michael Sukkar, responded to Bowen’s speech by demanding Labor provide economic modelling to show the effect of its negative gearing policy on housing affordability and rents.

He noted that the McKell Institute had found housing supply was the biggest factor in affordability.

Sukkar said of 2m taxpayers with investment properties, 72% own just one and 90% own no more than two.

The Australian Financial Review and the Australian have reported that the government is considering encouraging retirees to downsize their homes by exempting the proceeds from new limits on superannuation.

The government could exempt the proceeds of a sale of a large family home from the $1.6m cap on a super fund and the non-concessional amount that can be contributed annually, in an effort to free up more stock for families.

Responding to the proposal in a statement, Bowen said Labor had supported measures to make it easier for seniors to downsize their housing without penalising them.

“If the government wants to help older Australians downsize their home, why did they abolish a Labor program that did exactly that,” he asked in reference to a pilot program in the 2013 budget.

“We’re receptive of similar measures subject to our normal policy processes and ensuring the government doesn’t botch their implementation.”

Despite talking up the prospect that the 9 May budget would contain a significant housing affordability package, the government is now ratcheting down expectations.

On Wednesday Liberal MP Karen Andrews told Sky News that housing affordability was a “key issue” but many factors including state and local government policy affected affordability.

Andrews pointed the finger at state governments in particular for “being extraordinarily silent” on their powers to affect affordability through supply of land, infrastructure costs of development and stamp duty.

“I think it’s actually about time that all the governments start to work together to address the issue, rather than each layer of government trying to do something in the areas it can impact alone,” she said.

This article was originally published on the Guardian – Read the original article.

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*The information provided in this article is general in nature and does not constitute personal legal advice. The information has been prepared without taking into account your situation or needs. Before acting on any information you should consult the right advisors and whether the information is right for your personal situation.

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