Wednesday, January 2, 2008

First Home Owners Grant has driven the housing affordability crisis


There has been much publicity recently about Australia’s growing housing affordability crisis. And quite justifiably. The 3rd Annual Demographia International Housing Affordability Survey released earlier this year puts Sydney, Hobart, Perth and Melbourne in the 25 least affordable housing markets in a study of Australia, New Zealand, United Kingdom, Republic of Ireland, United States and Canada. Shocking research such as this study has put pressure on the Federal Government to relieve pressure through tax reforms and incentives. 

Young Liberal Micheal Janda, in an award winning essay, proposed that the First Home Owners Grant was a positive move to combat unaffordability, yet this has simply not been the case.

The FHOG was intended to assist first home buyers to offset the impact of the introduction of the goods and services tax (GST). Apart from the obvious indirect relationship that GST and home buying have (since residential dwellings are GST exempt) and that the GST had impacts on all people, not just potential first home buyers, there is startlingly clear evidence to suggest that the FHOG was the stimulus for a reduction in affordability since 2000.

From the 1st July 2000, home buyers who had not previously owned their own property were given $7,000 by the federal government. Immediately, the price of housing in all areas would rise by at least this amount, for a first home buyer could offer for example $5,000 more for a property and still be $2,000 better off than another buyer. 

 In an instant, prices all residential markets rose by $7,000. 

Not only were the buyers who were already in a position to buy now helped along, but those who could not have been in the market except for the grant had started buying. This lead to an increase in potential buyers in any given area, thus an increase in aggregate demand for residential property, and following basic economic principles, an increase in prices. So not only were prices increased by $7,000, but also the flow on effects of a larger pool of buyers lead to further rises. Of course, looking at other flow on effects, or transformational effects, it could be stated that this rise in prices stimulated even more speculative investment, thus leading to a positive feedback cycle where as prices are seen to rise, more investment is made, raising prices even further. In property terminology this would be labelled a boom.

Addressing housing affordability is not a simple task, and like many other crisis, there is no silver bullet. Solutions will need logical foundations and sufficient time to wind back the crisis without causing other new crises. The call from the property development lobby to rezone more land for development is another counter-productive suggestion. There is already surplus land with development potential. But developers must wait for prices to rise before they can develop it. Can you imagine a property developer moving in to an area and selling below current market prices to forse the market down? It will not happen.

One of the best suggestions to address this crisis is a gradual movement of tax subsidies away from investment property to owner occupied dwellings. Currently, all maintenance expenses, interest on loans, and depreciation are all tax deductible for investment property. For your own home, you get nothing except a tax break on capital gains tax if you sell.

For a home purchased for $400,000, the tax benefits to the investment buyer over the home owner could easily exceed $15,000 dollar per year. The comprises of tax deductible interest and depreciation of the building, as well as rates and insurance costs. It makes the FHOG look like a token gesture.

Let’s get serious about the issue, and get people into their own homes. The benefits of home ownership to communities around Australia should be acknowledged and acted upon today.

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