Housing affordability foibles

Eight years ago I wrote in my weekly e-mail that the first home owners grant should go. I argued that it drove up the prices of housing to the advantage of existing owners and did nothing to make first homes more affordable.

At the time, then backbenchers (now senior ministers) who call themselves economic conservatives were arguing that the grant should be doubled or even tripled. It was a foolish and populist quest that ignored the reality of economics and human nature.

I even recall getting a phone call from an annoyed frontbencher to tick me off for opening this can of worms. Amazingly, during that conversation it was accepted that dropping the first home owners grant would make housing more affordable than retaining it.

Therein lies the reality of modern politics. You argue publicly to retain a policy even though it has the opposite effect of what you intend because it makes you look like you are doing something. Sure, it might waste money but what price can you put on ‘decisive action’?

Consider that these people are now a senior part of the government and it's no wonder there seems to be little difference between the major parties.

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But the lessons haven’t been learned at any tier of government. The Victorian government announced this week some new initiatives to help first home owners. They are as absurd and irresponsible as previous attempts.

The first step was to axe stamp duty for first home owners up to a threshold level. Now, reducing taxes is a good idea but the respite will be short lived as buyers will just bid up prices to match their increasing cash availability. In fact, it could make things worse as banks wouldn’t previously lend to pay stamp duty costs whereas now they will finance the additional house purchase price. What could go wrong? More debt and higher prices for those buying their first home.

But that’s not the dumbest thing the Victorian government has announced. They will also be co-investing in the purchase of homes (up to 25%) to make them more affordable. That’s right, if you can’t afford a home the government will partner with you. I am not sure what happens if your property falls in value or you can’t pay your mortgage. Will the government bail you out or meet your mortgage commitments? I guess the answers are all in the detail which is yet to be announced. However it means that all of us are underwriting the purchase of other people’s houses through our tax dollars. The Federal Treasurer finds the policy ‘interesting’. I find it idiotic.

Wouldn’t it be simpler and neater for the government merely to nationalise the banks and control housing affordability that way? And no, I don’t advocate that course of action but the principle is similar. I am sure some in politics would find that proposal ‘interesting’ too!

Now, few will argue that housing affordability isn’t a problem but cash handouts and government lending won’t solve it. There are two keys to making housing more affordable and they can both be fixed by government.

The first is supply. State governments currently land bank and impose impediments to the release of new land for housing. Increase supply and prices will stabilise or fall as demand is met. Sure that won’t mean a 25-year-old hipster will be able to afford a harbour-side house in Sydney but it will mean the regular family should have a realistic aspiration of becoming homeowners.

The second is taxation. It is estimated that around 40% of the construction cost of a new home is attributable to various taxes and charges. These need to be reduced. Lower personal taxation rates will also reduce the incentive for people to ‘negatively gear’ into housing in order to cut their high marginal tax obligations. In turn, this will reduce the taxpayer-funded ‘subsidy’ to residential property investors.

The crisis of housing affordability demonstrates once again that government programs, no matter how well meaning, often create far greater problems than they solve. Far better to let the market do its work and to ensure that individuals accept the consequences of their own decisions. Property prices are cyclical like every other asset class. There is a time to purchase, a time to hold and a time to sell. In an attempt to break this cycle, successive governments have made the problem much worse than it should be.