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Wednesday, 11 October 2006
Page: 222


Mr HATTON (12:49 PM) —I am in continuation in this debate on the Defence Force (Home Loans Assistance) Amendment Bill 2006. I will have a crack at finishing, but I think I might come up short again. It has been a while since I have spoken on this bill. When I spoke previously for about seven minutes, I made the core point about this particular bill in relation to defence matters. I quote from the library’s Bills Digest:

A review of the DHOS—

the Defence Home Owner Scheme—

was announced by the ADF on 10 May 2006. The broad objectives of the review—

which are allowed for in the next year by the extension of the existing scheme for a year under this bill—

are to develop a revised scheme that:

  • supports recruitment, retention and resettlement;
  • is cost effective for defence; and
  • recognises the benefits home ownership provides to both members and defence.

A criticism I made previously—the criticism made by the shadow minister for defence, the member for Barton—in part went to the whole question of timeliness. Instead of an extension for a year, the review should have already been conducted. We should have been at the point now where new legislation could have been introduced to introduce a new scheme which would go to all those points.

We are by necessity happy to support this extension so that a proper review can be undertaken of a defence home ownership scheme that necessarily needs to take place over an extended period of time this year to make sure that you get the right outcome, because circumstances have dramatically changed since 1991, when the former Labor government introduced the Defence Home Owner Scheme. When it was introduced, the original subsidy, given that it was 1991, was $40,000 per member of the Defence Force. That was later increased to $80,000 per member of the Defence Force. Where there is a married couple, currently it is $160,000 for that couple. But if you were to look, as the shadow minister for defence did, at the specific operation of the bill, you would know that $80,000 is not going to get you very far and you would know that $160,000 is also not going to get you very far either and that in that circumstance you will not go very far at all in terms of paying for the full cost of a loan.

As I pointed out last time, we are dealing with a cocktail loan situation. During the member for Bennelong’s period as federal Treasurer, the way in which people got loans for housing was by virtue of a cocktail loan. You could get a relatively small amount of money from a banking institution, but then to get the rest you had to go to a much higher rate of interest from non-bank institutions. The fundamental change made by Treasurer Keating in the last Labor government was to give banks primacy of place within the lending system and to allow—in 1991 under the Defence Home Owner Scheme, through an agreement with the National Australia Bank—a scheme whereby defence personnel were subsidised, with particular reference to their very unusual circumstances, as a way in which to try to keep people in and offer them the benefits of home ownership when they are in fact peripatetic by nature. They wander from one end of the country to the other or they are posted overseas. They know that they may be in one place for a year’s or a two-year or a three-year posting. They may, if they are lucky, get an extended period of posting, but they can travel from one end of Australia to the other and therefore it is no surprise to anyone that a lot of people prefer to rent rather than to buy.

I want to quote directly from the shadow minister in regard to this because he gives a pretty good example of just how the scheme operates:

As an example, a loan of $80,000 at, say, 7.7 per cent would require a payment of $569 per month. The subsidy on that would be $120.93, leaving a reduced payment of $448 a month. That is a significant saving but the drawback is that, if you are in advance of repayments, you cannot redraw—that is, you cannot re-borrow the amount of your entitlement. You can, however, transfer the loan to a new property once the existing property is sold. In essence, that is a summary of how the scheme works.

In essence, that is a summary of how the scheme works. However, although it is portable, there is a fundamental problem here. It is portable only after you have sold the existing property and then gone on—you can then go and buy a new property. However, everyone in Australia knows, including people in the defence forces, that selling a property you have not owned for very long in fact puts you further back. Although there is an advantage because of this subsidised home loan scheme, the cost of taking out the mortgage in the first place—and, in particular, in the first five years the relative amount of interest you are paying on that loan—is significant. There are also costs associated with selling. It is also the case that where you are geographically and whether you are in a rising or declining interest rate environment will have an impact on you.

The shadow minister pointed out that currently there are 6,500 ADF personnel using the scheme. But if you compare that to about 70 per cent home ownership in Australia as a whole, it is no wonder you would say there is a fundamental disjunction here between the percentage of home ownership in Australia and the percentage of home ownership in the defence forces. A core part of this is because Defence Force people move around a lot, but also there is the issue of the relative benefits to people in taking the home ownership subsidy versus taking what are comparatively generous rental subsidies.

As I pointed out last time, if you talk to the young people who are at HMAS Cairns or who are at other posts around Australia, mostly they are in rental accommodation. For those people who are young, not yet married, just starting out in the services, you can understand the fact that they would not pin themselves down. I spoke to a number of people at HMAS Cairns, including one senior officer who had spent a whole life of service within the defence forces before she undertook to buy her own home—in this case in the Cairns area. She had lost the benefit of that defence home ownership scheme over all of those periods of her service. She had gained some benefit from the rental subsidies, but she could have done much better. She could have had the whole life of her Defence Force career to pay off that loan rather than be in a foreshortened position at the end. That is one of the factors that we need to look at in the review.

I also want to look at the context of why it is important to have a review now and why that is so significantly different to what the situation was before. Mr Deputy Speaker, I draw your attention to the first part of the second reading contribution by the member for Fisher, where he was arguing that the member for Barton had misunderstood what the Prime Minister had said. He said that the problem was not interest rates, which was what the member for Barton was saying; it was the lack of availability of land. I do not think there is much lack of availability of land up in Cairns. I do not think you would find much lack of availability of land throughout most of the defence postings in Australia. I do not think you would find that across a number of areas where people might buy and locate themselves. But he went on to say this—and this is indicative of part of the problem, at least with the member for Fisher:

I think the member for Barton unintentionally placed interest rates as being the reason for people being unable to purchase homes, which is a fairly unusual statement bearing in mind that interest rates, relatively speaking, are still low compared with what they have been historically.

I am sorry, Mr Deputy Speaker, but that is just plain economically illiterate to simply argue that the notional level of interest is now low, that there was a higher level previously. I would have to grant that the level now is much less notionally than the level of interest was when the member for Bennelong was Treasurer. When the member for Bennelong was Treasurer, we had double-digit interest rates. We also had a double-digit inflation rate and a double-digit unemployment rate. It may be correct to say that, on a notional basis, if you do a straight comparison between the interest rates and say that 7.7 per cent is less than 10.9 per cent, which is what the interest rate was in January 1983 when the member for Bennelong was Treasurer, then one is lower than the other. But what you have to take into account is the effective rate of interest. What is the effective rate of interest? You work out the effective rate of interest by taking away the inflation rate from the interest rate.

The people in the Reserve Bank know and understand this, and I would hazard a guess that the people in the National Australia Bank who are actually running this scheme know and understand it as well. It is not just the headline rate; it is the effective rate of interest. That is why, if you look at the rate of inflation over the period of the Labor government—over the 13 years—you will see that we had a five per cent rate of inflation over that period. What you had under the Fraser period was a 10 per cent rate of inflation. We had high unemployment during that period. There was equally high unemployment during the Fraser period because of the recession of 1982-83.

The impact on interest rates and how that directly impacts on people in the defence forces is told in this way—not in terms of the headline rate but in terms of the difference between the inflation rate and that rate. If you look at affordability, if you look at the question of just the comparison between how much people owe and how much those interest rates are, the indexes simply prove this. I think the index was 39.6 in terms of affordability in the Keating period. That is versus the housing affordability rate of 39.4 during the Howard period. The higher numbers indicate a greater degree of affordability in that situation, and this is what Labor has been arguing now for some time. The lower interest rate is based on the fact that inflation was smashed as a result of policies to deal with the recession. It should have been smashed for all time, but it has been increasing.

Let us look at the impact in terms of what this government had as its foundation in 1996. There was an inflation rate of 2.9 per cent. That inflation rate and the fact that inflation was smashed and contained have allowed a lower rate of interest in the subsequent period. We face the situation where, because of low inflation and relatively low perceived mortgages, and because of people taking up housing, we have had an explosion in the cost of that housing. It is the key reason why we need to look at affordability for defence personnel. That is the key reason why we need to have a review of this program.

The dramatic increase in cost is not just a result, as the Prime Minister would put it, of the fact that people are wealthier. There is a question of whether or not people can actually afford this. Given the historically low level of home ownership within the defence forces compared to the population at large, we desperately and urgently need this review. It should have happened already. It should happen in the next 12 months. (Time expired)

Debate (on motion by Mr Wakelin) adjourned.