Whenever someone proposes another way to improve housing affordability, you need to ask yourself one simple question – will this increase supply and/or reduce demand?
Those are the only two things that place downward pressure on property prices. Just ask agents in Sydney and Perth.
Sydney has been experiencing reasonably strong population growth, which has pushed up demand. At the same time, home owners have been reluctant to list, which has reduced supply, hence the boom the city has experienced over the past few years.
In Perth, the end of the mining boom has drastically slowed population growth, which has meant there haven’t been enough people to fill the developments that were planned during the glory years, hence the slump the city has experienced.
These two examples are worth remembering as we explore what does and doesn’t work with housing affordability.
What doesn’t work with housing affordability
Let’s start with what doesn’t work. That would be anything that increases demand or reduces supply, or anything that neither increases supply nor reduces demand.
First home owner grants sound great in theory, but they’ve turned out to be flawed in practice. That’s because cash handouts bring more buyers into the market, but do nothing to increase supply. Rather than reducing buyer competition, they increase it.
The exception to this rule is when grants are limited to off-the-plan homes or new builds, as any increase in demand is matched by an increase in supply.
Stamp duty was introduced to raise revenue, but it actually has an indirect effect on housing affordability. The problem is that some owners who are interested in listing decide not to do so when they realise how much stamp duty they’ll have to pay on their replacement home. The result is less stock on the market.
Neither increases supply nor reduces demand
Saving schemes are much ado about nothing, which is why not many people signed up for Kevin Rudd’s First Home Saver Account and why there are unlikely to be many takers for Malcolm Turnbull’s First Home Super Saver Scheme. These schemes do nothing to increase supply and, because they put little extra money in the pockets of buyers, they don’t really do anything for demand either.
How the federal government is addressing housing affordability
The federal government made housing affordability one of the focuses of its May Budget. The headline measures were:
- Helping new buyers save for their first home by allowing them to deposit up to $30,000 in special low-tax savings accounts; and
- Encouraging those over 65 to downsize by allowing them to make a non-concessional contribution of up to $300,000 in proceeds from the sale of a principal residence, held for at least 10 years, into their superannuation.
Supply-side measures included:
- Charging foreign investors a ‘ghost tax’ if they leave their properties untenanted for six months per year;
- Establishing a $1 billion fund to address infrastructure chokepoints that are impeding housing development in critical areas of undersupply; and
- Releasing suitable surplus commonwealth land.
Demand-side measures included:
- Introducing a 50 per cent cap on foreign ownership in new developments.
How state and territory governments are addressing housing affordability
All the state and territory governments addressed housing affordability in their 2017 budgets. (The exception was Western Australia, which is due to release its budget in September). The headline measures were:
New South Wales
• Abolished stamp duty for first home buyers on all homes up to $650,000 and reduced it for homes between $650,000 and $800,000;
• Introduced $10,000 grants for new homes up to $600,000; and
• Introduced $10,000 grants for people who build their first home on vacant land, if the house and land are valued at under $750,000.
• Abolished stamp duty for first home buyers on all homes up to $600,000 and reduced it for homes between $600,000 and $750,000; and
• Promised to reduce red tape around the redevelopment of public housing estates.
• Announced a temporary increase in the Queensland First Home Owners’ Grant from $15,000 to $20,000 for a further six months, for homes up to $750,000.
• Slugged foreign investors with a 4 per cent surcharge.
• Extended its $20,000 First Home Builders Grant for another 12 months; and
• Announced stamp duty relief of about $7,500 on the average cost of a standard off-the-plan house and land package; and
• Pumped $6 million into HomeShare, a shared equity scheme in which eligible buyers purchase up to 70 per cent of a property, with the government owning the rest.
• Promised to release 13,230 dwelling lots in the next three years, which it said exceeded the estimated level of demand for new housing.
The Northern Territory
• Budgeted $1.1 billion over 10 years to build new homes and upgrade existing homes outside Darwin.
The federal government deserves a pat on the back for giving pensioners an incentive to downsize, because this will bring more family homes onto the market.
Governments that have incentivised buyers to build new homes or buy off-the-plan will also stimulate supply.
The same goes for governments that have promised to build new homes, release extra land or make life easier for developers.
The more housing that enters the market, the more downward pressure that will be put on prices.
Whatever your views on foreign investment, those measures that have made life harder for overseas buyers will also place downward pressure on prices by reducing demand.
All those policies are likely to work. But two policies that are likely to fail are first home owner grants and stamp duty relief for first home buyers. Why? Because they’ll increase demand without increasing supply.