Allowing first home buyers to access their super to buy a house is a bad idea. All it will do is further lift the price bar that new buyers need to jump over, and debt will be the pole they use to vault it, writes Michael Janda.

The problem when politicians have thought bubbles is that they can take on a life of their own.

Australia is heading for what many - including the Government's own Commission of Audit and Productivity Commission - see as an overly expensive paid parental leave scheme due to an apparent thought bubble from the then opposition leader that had not been run past his own shadow cabinet.

This week, independent Senator Nick Xenophon had a thought bubble undoubtedly a lot more dangerous to the Australian economy.

Senator Xenophon's bright idea is to allow first home buyers to access part of their superannuation savings to put towards buying a property.

Like many thought bubbles, at first glance it looks like a great idea.

First home buyers are now estimated to be about a record low 12-13 per cent of the current owner-occupied housing market, and just 7-8 per cent when investors are added into the mix.

States have also wound back schemes that gave buyers a $7000 leg up when purchasing their first home - most of these grants have now been restricted to newly constructed properties.

However, these very First Home Owners Grant (FHOG) schemes provide the best evidence of why Senator Xenophon's idea is simply a recipe for higher prices and worse housing affordability.

About four years after the FHOG was introduced, ostensibly as compensation for the impact of the GST on the price of new homes, the Productivity Commission completed a report into first home ownership.

That report concluded that the extent to which such grants assist first home buyers into the market depends largely on how much they push up prices. This in turn, the commission said, depends on the how quickly the supply of housing can rise to meet extra demand.

Over the four years after the FHOG was introduced, median home prices rose 18 per cent per annum - this is the era in which the damage was really done in terms of Australia's house price to income ratios.

The Productivity Commission's conclusion was that relatively little of this price increase was due to the grant, due to its relatively small size of $7000, and it is true that the discount on capital gains tax introduced around the same time also played a big role (as I have written previously).

However, the commission appears to have overlooked the role of leverage - something pointed out by economist Steve Keen when discussing the significant demand and price impacts of the Rudd Government's First Home Owners Boost (FHOB) during the global financial crisis over late-2008 and 2009.

Basically, giving first home buyers an extra $7000 potentially allows them to pay $35,000 more for a property - the grant money towards a bigger 20 per cent deposit and then four times the grant money in extra debt.

There is no reason that Senator Xenophon's scheme would have a different effect.

If first home buyers can pull $25,000 out of their super to stump up towards their deposit on a home, then they can leverage that up with their bank to pay $125,000 more for the home.

If tens of thousands of first home buyers do that, then you end up with further massive increases in home prices and household debt. If the people that sell their homes to the first time buyers then go and leverage those profits to reinvest in property the effect will be further magnified.

Just as with the FHOG and FHOB, all this proposal is likely to do is further lift the bar that new buyers need to jump over, and debt will be the pole they use to vault it.

Not only that, but they will have to either repay the money they have borrowed from their super (as in the Canadian scheme, where this is done over 15 years) or see part of their retirement savings tied up in home ownership.

Given how much of Australia's household wealth is already tied up in home ownership, this is a frightening prospect - just ask any decent financial planner or investment manager about the benefits of portfolio diversification.

Undoubtedly, much of Australia's home price problem is related to the impediments for housing supply to respond to demand - due to slow planning processes and other impediments.

However, it would be folly to exclude demand from the equation - Australia's home price to rent ratio is the fifth highest amongst developed countries. Demand for ownership outstrips demand for rental accommodation largely because of the tax breaks and incentives that favour those who buy, either for owner-occupation or to lease out.

The Housing Industry Association has backed Senator Xenophon's thought bubble enthusiastically, because an increase in demand means more new property sales at even higher prices for its members.

So while the Senator might have had the best intentions of helping first time buyers into the market, he'd be much better off pursuing policies that reduce demand for buying property (such as ending some of the less equitable tax breaks like negative gearing) rather than one that will simply pump up Australia's latent housing bubble further and tie the nation's fortunes even more closely to its over-priced real estate market.

Michael Janda is an online business reporter with the ABC. View his full profile here.