COMMENT
Illustration: Rocco Fazzari
Economics teaches us to see things that we can't see with our eyes.
John Maynard Keynes once wrote, agreeing with Lenin, that when governments debauch their currency by inflating it, they are destroying, in a secret and unobserved way, part of the wealth of their citizens.
He wrote that sentence in 1919, after the squalor of the negotiations over war reparations.
But the kind of phenomenon he was describing – where you think you're seeing one thing when something deeper is going on – is everywhere in modern economies.
Take the problem of housing affordability.
For years the federal government has provided first home buyers with grants worth thousands of dollars to make houses more affordable.
It sounds like a good idea, but if you look at the policy long enough you'll see that it doesn't help first home buyers one bit.
It pushes up the price of houses by the same amount as the government grants and leaves first home buyers in the position where houses are no more affordable than they were before the grants were handed out.
It makes the grants necessary just to stay in the race. What a dumb waste of resources.
One consequence of wanting to see beneath the surface of economic activity in this way is that you have to be prepared, if you want to be intellectually honest, to follow the logic of economic theory to its conclusion.
You may feel that a first home buyers' grant is a beneficent thing, but if the theory says otherwise and you believe the theory can be trusted, then you ought to be prepared to drop your emotional support for the policy and adopt a position you find counter-intuitive.
I've had to do that recently on a different topic.
I was asked by a friend if I thought we should be able to use our superannuation to buy our first home. I said we should.
Why should we be forced to put a sizeable proportion of our wages into a super fund while also saving and borrowing to buy our first home?
Wouldn't it be better to use our super to buy the house and then spend the rest of our life saving for retirement in the comfort of our own home?
That was my emotional reaction, but it was wrong.
I'd twisted into a confused mess my reservations about the super system with my frustration with the state of housing policy.
Those things should be untangled if I want to answer the question properly.
So, to have a second crack at it, I'd say that my real concern is with housing affordability, and the depressing rate at which house prices have been growing in recent years.
If we want housing to become more affordable then, no, I don't think people should be allowed to dip into their super to buy their first home.
Why? Because in a supply-constrained housing market – such as we have in Sydney and Melbourne – anything that allows people to spend more on housing than they otherwise would will only result in house prices rising further, and perhaps faster, than they otherwise would.
In this sense, there's no difference between allowing people to dip into their super to buy their home and handing them a first home buyers' grant. Same thing with stamp duty concessions, or allowing mortgage interest as a tax deduction.
Given the supply of housing is barely moving, all those policies will do is increase the demand for housing, thus pushing up prices.
If we want housing to become more affordable in a supply-constrained world – and it's likely to remain supply-constrained for the considerable future – then we have to try to reduce the demand for housing.
Saul Eslake, an economist at Bank of America Merrill Lynch, says one of the best ways to do that is to get rid of negative gearing for new investors.
Negative gearing is a tax regime that allows investors to buy an asset and write down the interest costs against other income.
When it comes to real estate, negative gearing occurs when the costs of owning a property – such as the interest on the loan, or repairs and maintenance – are more than the income the property generates for you.
In normal circumstances it doesn't make sense to enter a financial arrangement like that.
But it does make sense if you expect the value of the property to increase by more than the losses you're making.
And that's what a lot of people have been expecting this year, with good reason – national house prices have risen 10 per cent on average over the past 12 months. In Sydney (15 per cent) and Melbourne (12 per cent) they have risen by much more than that.
But the combination of our capital gains tax rules and negative gearing has been artificially increasing the demand for investment housing and pushing up the price of surrounding homes.
In the past 12 months, investors have been borrowing more to purchase established housing than owner-occupiers have.
As Eslake says, that's clear evidence that aspiring owner-occupiers can't compete with investors who have their debt-servicing costs subsidised through the tax system.
So if we want houses to become more affordable for first home buyers, it's time we fixed this mess.
Let's leave the question about whether we should be allowed to dip into our super for another day.
