Australia’s forgotten savers
Ideas@TheCentre – The CIS newsletter (Sydney), 6 November 2009
Whenever the Reserve Bank lifts interest rates, all newspaper editors seem to ask their reporters for the same story: ‘Find me a young family struggling with higher mortgage repayments.’ And they always do: After Tuesday’s 25 basis points rate rise, the business section of The Age introduced its readers to a couple, both 29, who were now planning to cut back on Christmas presents for their nine-month-old son. Their Christmas celebrations were also called off, and if there were more rate rises in the future, ‘we don’t know how we will cope,’ one of them complained.
Heart-wrenching stuff? Or maybe just a bit cringe worthy? After all, did anyone really believe that the RBA would keep interest rates at historic lows forever?
Australian newspapers seem to have a big heart for heavily indebted homeowners. Nothing wrong with that. But occasionally they should show an equal amount of compassion for tenants and savers.
Take house prices. Strangely, price increases in any other market are called inflation, but when house prices go up then the market is said to be ‘healthy’ or ‘robust’ or ‘doing well.’ But house price increases are only shifting wealth from owners to non-owners. Rising houses prices never create wealth. In fact, they make tenants wishing to buy property worse off.
With interest rate rises it is the same bias. You will always find someone complaining about higher repayments. But in the past, did you ever hear a saver complaining about falling interest rates? Probably not because savers don’t matter much in our property-obsessed society.
The underlying bias against savers and tenants in favour of homeowners and mortgage-takers translates straight into policy. Taxation is the best example: If you own your home, you enjoy the returns on your capital (i.e. the imputed rent) tax-free. If you are a saver, however, you have to pay income tax on the interest. You even pay tax on that part of the interest which keeps your capital stable in real terms, i.e. the inflation component. Homeowners, on the other hand, can eventually realise most of the capital gains on their property tax free.
Australia’s addiction to the property market needs to stop if we care about housing affordability. And if we care about the level of private debt, then we need to make saving a much more attractive option for young Australians.
And to these pitiful couples that Australian newspapers always find after RBA rate rises, we should finally tell the truth: If you can only afford the repayments on your mortgage at emergency rates, you should have never bought a house in the first place.