Renters can't home in on jackpot

The world tends to be run for the benefit of the older generation, at the expense of the younger generation. In the case of home ownership, for instance, the rules favour existing home owners to the cost of young people trying to break into home ownership.
Why are the rules biased in favour of the oldies? Because there are more of them, and they are more aware of their interests, better organised and more vocal. The pollies kowtow.
Home ownership is becoming increasingly unaffordable because the demand for well-located housing exceeds its supply, thus pushing up prices. This situation is largely of our own making because our homes are at the centre of our material aspirations.
The more our incomes rise - and, going back to the 1990s, the more interest rates fell back - the more we are willing to borrow in our efforts to trade up to a better home.
So great is our preoccupation with housing and so great is the willingness of first-home buyers to make sacrifices to attain a home of their own that I expect affordability to continue worsening.
Because it is on the minds of so many young people and their parents, home affordability is getting a lot of air time in the undeclared election campaign. Both parties are happy to express their deep concern, but neither side will do much to improve matters.
And some of the measures they promise will actually make things worse. That is because genuine solutions to affordability are counter-intuitive - contrary to common sense - and pollies often settle for "solutions" that don't work but sound like they should.
Because the fundamental cause of hard-to-afford prices is demand exceeding supply, the only genuine solutions involve either increasing supply or reducing demand.
What don't work are efforts to make high prices more affordable by increasing the first-home owners' grant, cutting stamp duty, introducing shared ownership schemes or a subsidised saving scheme.
All those measures would work if you were the only person who benefited from them. That is why they sound like they would help. But because all the other would-be home buyers you are competing against also benefit, the attempt to make prices more affordable ends up pushing them higher.
There is, however, something governments - particularly a federal government - could do that really would make homes more affordable. It is something most economists think about but rarely mention - because it is so counter-intuitive and because no pollie would ever contemplate it.

It is to remove the various hidden tax advantages that have been conferred on owner-occupied housing. There are four main concessions.
First, the capital gain on the sale of your principal residence is exempt from capital gains tax, unlike all other capital gains.
Second, when you rent your home from a landlord, any net profit he makes (after allowing for interest and other expenses) is taxable and any net loss is tax deductible. But when owner-occupiers rent to themselves, so to speak, the net profit or loss is ignored for tax purposes because no money changes hands.
Third, the owners of rental properties are usually subject to state land tax, whereas owner-occupiers are exempt from land tax. This puts renters at a disadvantage to the extent that landlords are able to pass the tax on to them.
Fourth, eligibility for the age pension and other welfare benefits is subject to a means test (a kind of tax), but owner-occupied housing is not counted among your assets.
Most of these exemptions have existed for many decades. The pollies who introduced them did so in the name of encouraging home ownership - making it more affordable.
Trouble is, they do the reverse. Why? Because they make investing in a bigger and better home more attractive - more "tax-preferred" - than investing in anything else, such as shares or rental property (unless such investments are negatively geared).
Think of it this way. At present we have two reasons for wanting to pour money into our homes - for our own consumption and as a tax-preferred investment. So if we were to remove the tax-preferred status of owner-occupied housing we would significantly reduce the demand for bigger and better housing, thus lowering its price and making it genuinely more affordable.
Do you see what the special tax-free status of housing does? By pushing up the price of homes it makes it that much harder to attain the state of being a home owner, but makes the benefits of home ownership even greater if you manage to make it. The jackpot's bigger, but harder to win.
And a system that is biased in favour of owner-occupiers is a system that is biased against renters. That's unfair to people who spend all their lives as renters, as well as making it harder for would-be home owners to make the leap.
By being too greedy - by wanting home ownership to be a lucrative investment as well as wanting it for lifestyle and security of tenure - we have made it that much harder for our kids and grandkids to enjoy what we enjoy.
So why don't the pollies who profess to care so much about affordability make home ownership more affordable by eliminating its tax-free status?
Partly because instituting such a counter-intuitive policy would be so hard to explain to the public.
But that is not the main reason. It is because ending the tax-free status of owner-occupation would constitute a big transfer of wealth from the older generation to the younger generation - from existing home owners to would-be home owners, present and future.
The oldies would quickly realise how much they had lost, whereas a lot of young people wouldn't quite realise what they'd gained.
People who had struggled to achieve home ownership under the old rules would find the size of their prize suddenly diminished. The pollies know they would be crucified.
We love our children and we worry about them. But we don't worry about them that much.

China's long march doesn't miss a beat

DAI YUNPING has never travelled far from his home. But next month he will indulge in a week-long tour of South-East Asia to the tune of $US6500 ($7700). Upon his return, Dai, 27, plans to move out of his parents' home and buy an apartment in the old French Concession area.
Where is the money coming from? Not from his family, nor his $US650-a-month salary job as a trade merchandiser. Over the past three years Dai has made more than $US200,000 on the stockmarket - and now he is starting to live it up.
"I don't hesitate any more to go to expensive restaurants," Dai said on a recent afternoon as he checked his accounts at a packed trading hall, a case containing a new $US1600 Hewlett-Packard laptop slung over his shoulder.
Stockmarkets around the world have been wobbling amid turmoil in the US subprime mortgage industry and increasing worries about a possible economic downturn in the US. China's stockmarket has bounced up and down, too, but it has mostly gone in one direction. The benchmark Shanghai composite index has climbed more than 350 per cent since the start of last year.
On Monday, in what has been a common pattern, the Shanghai index rose 1.5 per cent, even though every other stockmarket in Asia fell in the wake of the unexpectedly weak US employment report that rattled Wall Street. It closed the week at 5327, up 33 points from its close the previous Friday.
Analysts point out that China's stockmarket marches to its own beat. It is virtually closed to foreign investors, yet money is gushing in from speculators, state-owned companies flush with foreign reserves and savings-rich Chinese citizens who have limited investment options.
Nowadays in China stock investors are busy counting - and spending - their profits, producing the first signs of an emerging wealth effect, a term that describes how consumption rises as investors see the value of their stock portfolios increase.
Leo Wong, general manager of Shanghai's Bentley dealership, is one beneficiary. This year Wong's shop has been selling 10 Bentleys a month, for about $US400,000 each on average, double the number of sales last year. Wong figures half his buyers stepped up to a Bentley because of surging stock profits.
Managers of high-end restaurants and boutiques also say they have seen an increase in business in recent months. So have tour operators such as China International Travel Service, whose managers were stunned to see how quickly their new 12-day Mediterranean Sea cruise, at $US4000 a person, sold out this northern summer.

"I know the stockmarket is boosting our overseas travel sales," said Zhao Dexiang, the company's deputy general manager. Many of his customers, he said, belonged to a travel club in which they had talked about "wanting to take their families to more luxurious trips because they made quite a lot of money from the stockmarket."
Economists say it is almost impossible to measure the wealth effect in China, because of a lack of reliable statistics. Most doubt the effect is very big at the moment, given that the boom in equities has benefited only a sliver of society.
More than 100 million stock trading accounts are registered with the Shanghai and Shenzhen exchanges, but most of the investors hold dual accounts and many accounts have little or no money in them, according to experts and government reports.
Still, a significant number of people in cities such as Shanghai have a direct stake in the stockmarket, and the ranks of small investors are swelling as elderly and other working-class people, being fed up with paltry returns from banks and hearing stories about neighbours getting rich, are buying stocks individually or pouring money into institutional funds.
Retail spending in China has accelerated in recent months, growing at an annual rate of about 16 per cent. The gains reflect higher wages and food prices. But it is also likely that rising stock and home prices have helped boost consumer confidence.
In the northern spring, when the Shanghai composite index was climbing towards 4000, the Chinese stockmarket was full of investor apprehension and warnings of a bubble. Senior government officials, including the Premier Wen Jiabao, and state-controlled newspapers spoke about the dangers of irrational optimism and risks to common people. In late May Beijing suddenly tripled the stock trading tax, sending the Shanghai market tumbling 15 per cent over several days and inciting anger among investors who chided the Government for its heavy-handed ways.
Since then, as the index has shot past 5300, there has been hardly a word from Beijing about the heady market.
"There's no news from the Government, because they know it would not be very effective," said Liang Weipei, an independent stock analyst in Shenzhen.
Ordinary investors and analysts alike now believe that the Government would not dare do anything rash before the National Congress in mid-October, lest it foment unrest and embarrass Government leaders. In fact, many people are betting that China's stocks will stay red hot until at least the Olympics next August.
Government officials have more than political security at stake. Analysts say it is likely that a large amount of money that is flowing into the stockmarket is from government agencies and state-owned institutions. Chinese insurance companies, for example, are generating a substantial chunk of their earnings from investment returns.
"Why would they want to spoil their own party?" said Fraser Howie, a financial analyst and co-author of Privatising China: The Stock Markets and Their Role in Corporate Reform.