to the Federal Treasury on the Implementation of the First Home Saver Accounts February 2008
Comments are addressed to: General Manager Personal and Retirement Income Division The Treasury Langton Crescent PARKES ACT 2600 Email address: homesaver@treasury.gov.au Introduction and background Page 1 Lead indicator to the Housing Supply Council Page 2 Education for young Australians and parents Page 2 First Home Saver Accounts for minors Page 3 Incentive to start saving through salary sacrifice Page 3 Offsetting the burden of Mortgage Insurance Page 4 Conclusion Page 4 HIA: Chris Lamont, Senior Executive Director Industry Policy Housing Industry Association 79 Constitution Avenue Campbell ACT 2612 (02) 6245 1300 c.lamont@hia.com.au 2
1 Introduction and background The Housing Industry Association (HIA) congratulates the Australian Government and The Treasury on the decision to introduce First Home Saver Accounts. The measure is designed to reward and promote a savings culture and at the same time assist in fighting inflationary pressures in the Australian economy. HIA developed and proposed the introduction of these accounts as a means of rewarding Australians saving for a home of their own. The measure is also designed to avoid the reliance on 100 per cent loans as too often the only means of entering the housing market. The measure as outlined in the Treasury paper, First Home Saver Accounts, Outline of proposed arrangements, will provide tangible rewards for those Australians who commit to a savings plan and stick with it. The latest report from the Commonwealth Bank and HIA shows that housing affordability fell by 1.7 per cent in the December 2007 quarter, reflecting an interest rate rise in November and double digit growth in established house prices over the quarter. Housing affordability conditions in the December quarter were the lowest since the series commenced in 1984. High statutory charges, infrastructure and development contributions, increases in interest rates, and onerous red tape have each increased the price of new housing, reduced supply and as a consequence of strong demand exacerbated price pressures in established house prices. Today one in every two first home buyers faces mortgage stress, and the house price to income ratio is now approaching 9.1 compared to 5.3 in 1997. Multiple 10 9 8 Interest Rates and House Price/Income Multiples, Australia Per Cent 30 8.7 Price/Income Multiple 25 7 6 5 5.3 20 15 4 3 4.1 4.3 10 2 1 0 Mortgage Interest Rate 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 5 0 Source: CBA: ABS; Cth Treasury; Withers et al; HIA First Home Saver Accounts Page 1
Clearly the decline in housing affordability is not cyclical but structural, hence the need for a mix of measures to improve the accessibility of home ownership for present and future generations. To assist the Australian Government in finalising the design of First Home Saver Accounts the following comments and recommendations are provided. 2 Lead indicator to the Housing Supply Council The Australian Government will soon establish a National Housing Supply Council. It is understood that the Council will provide research, forecasts and policy advice to the Commonwealth Government and COAG, and will publish an annual State of Housing Supply Report analysing needs up to 20 years into the future. HIA believes that it is highly desirable for the purposes of planning housing supply that details on the amount of funds, number of deposits and location of account holders be supplied to the Council. Deposits in First Home Saver Accounts will provide an invaluable leading indicator of planned house purchasers and if used correctly could assist the industry as well as state and local governments plan for new construction and associated infrastructure requirements. Information proposed for the Housing Supply Council would not require a level of detail that would breach personal confidentiality. Information collected in aggregate relating to the size of deposits, date account was opened and location of account holder would be sufficient for planning and supply purposes. This information used correctly, would provide state and local governments assistance in planning for the provision of essential and community infrastructure. Furthermore, the information would be used by the housing industry to plan for new developments. Sufficient warning of consumer demand would allow the housing industry to plan additional supply and thus avoid price pressures on existing housing stock arising from an increase in demand. 3 Education program for young Australians and parents The outline of proposed arrangements for the First Home Saver Accounts makes no mention of a public education campaign in respect to the operation and rewards provided by the First Home Saver Accounts. HIA strongly recommends that consideration be given to an education campaign, promoting the incentives and operation of First Home Saver Accounts. The audience for an education campaign will be diverse, however, HIA envisages three primary interest groups. The policy initiative is obviously directed towards young Australians (18 and over), however, parents, and mature age persons who have not previously purchased a home are also expected to be interested in further detail and information. First Home Saver Accounts Page 2
Education, in particular financial literacy education, is an important key to a more secure and financially stable Australia. The success of this policy initiative will involve both take-up and account holders remaining committed to a savings plan. It is therefore recommended that an education campaign not only outline the operation of First Home Saver Accounts but provide information and tips on how to improve and embrace what may be termed a savings culture. To facilitate the above, education campaigns should avoid complicated jargon and provide clear and concise information targeted to the groups identified above. The education campaign would be enhanced by the addition of some practical tips for savings as per those outlined in the Australian Government, Understanding money How to make it work for you publication. 4 First Home Saver Accounts for minors Eligibility criteria as documented in the outline of proposed arrangements specify that an applicant must be aged 18 and over and under 65 years and open the account for themselves 1. It is recommended that consideration be given to allowing minors to have an account opened on their behalf by a parent or guardian. Under these arrangements contributions could not be made by a minor, however, contributions could be made by a parent or guardian of amounts not exceeding $2,000 per annum. These deposits would not be eligible for the Government co-. Contributions to these accounts (for minors) would be post-tax and would provide significant benefit in a child s formative education on the value and rewards of saving. 5 Incentive to start saving through salary sacrificing To assist with the take-up of First Home Saver Accounts and provide an additional incentive for many to start saving, HIA recommends that consideration be given to making deposits eligible for salary sacrifice. Eligibility for salary sacrificing could be limited to specific income groups and for a limited number of year(s). It is envisaged that allowing salary sacrificing would provide a valuable means of encouraging participation and would provide a incentive to increase saving and reduce consumption. The arrangements that currently exist, allowing wage earners to salary sacrifice additional contributions to superannuation would provide the basis for contributions to First Home Saver Accounts. 1 First Home Saver Accounts, Outline of proposed arrangements, page 11 First Home Saver Accounts Page 3
6 Offsetting the burden of Mortgage Insurance Aspiring first home buyers unable to save for a sufficient deposit are required to take out mortgage insurance. It is hoped that the operation of First Home Saver Accounts will significantly reduce the need for Mortgage Insurance. Currently, if a home purchaser borrows more than 80 per cent of what a lender considers the value of a property, mortgage insurance will be required. Mortgage insurance protects the lender in the event that a mortgagor defaults on a loan and the outstanding value of your loan is greater than what lender receives from selling the property. Many first home buyers are under the mistaken belief that they can make a claim on this insurance should they experience financial hardship and become unable to service repayments on their mortgage. While the cost of mortgage insurance varies in accordance with the value of a loan, most premiums for mortgage insurance are between $2,000 and $2,500. HIA believes that consideration should be given to the implementation of regulation, making it compulsory for providers of mortgage insurance to offer reductions in mortgage insurance premiums (should it be required) for purchasers who have demonstrated saving through the use of a First Home Saver Account. 7 Conclusion HIA thanks the Australian Government and The Treasury for the opportunity to comment and looks forward to discussing the recommendations detailed above and assisting in implementing First Home Saver Accounts. First Home Saver Accounts Page 4