There are ways to make housing cheaper for those locked out of the market, but little political will to let house prices fall
Do you want house prices to be higher or lower? I think they should go down, but relax, few people agree with me. Especially people who already own a home or four, and especially politicians. Try telling two-thirds of voters that you want the price of their biggest asset to fall.
To avoid this awkward reality, we don’t talk about house prices as a policy problem, we use the weasel words of “housing affordability”. While virtually everyone agrees housing should be more affordable, virtually no one can tell you what that means.
Which brings me to Tuesday’s federal budget.
The government knows it must do something about housing affordability, but it obviously doesn’t want house prices to fall. So, once again, it grabbed for some announceables that sound like they should work – but government knows they won’t really do anything. Cynical huh?
Housing announceables are always framed as a way to give a preferred group of home buyers a “leg up” when in reality, all they really do is give existing homeowners a windfall. But before I explain how Tuesday’s announceables work, we need to talk about how selling a house works.
People selling a house want to get the highest price they can. Whether they sell at auction or private treaty they want to find the person who is willing and able to pay the most money. Competition between bidders is good for the sellers.
Now imagine there are 10 people at an auction and we offer one of them an extra $20,000 to put towards their deposit. If they are keen on winning the auction they will likely say: “Sure that’s great, with more cash I can bid higher and borrow even more from the bank. Win, win.”
Now if we only offered the bonus $20,000 to one of the bidders, we would have definitely given them, and the seller, a “leg up”. But if we make the same offer to everyone, then the only people we have helped are the previous owner of the home (who gets a windfall) and the banks (who make bigger profits off bigger loans).
So, back to the budget. On Tuesday night, the government lifted the amount of money people could deposit in the concessionally taxed first home super saver scheme (FHSSS) from $30,000 to $50,000. The FHSSS allows people to save some tax while they are saving for a home deposit by parking their deposit in their super fund until they are ready to buy a home. While the FHSSS does nothing to lower the price of houses or help people on low incomes save much, it does help people save a bit of tax on the interest they earn on their deposit. The fact that the government just needed to increase the amount of money you could park for a deposit by $20,000 tells you everything you need to know about how effective their “affordable housing” strategy has been.
Grants for first home buyers have a long and failed history in Australia but they never lose their appeal. They are simple to explain, the people who get them are grateful, and few recipients of a grant ever blame the person giving it to them for rising land prices, rising construction costs or anything else. In the middle of the Covid recession when there were fears that the construction industry might collapse, these sorts of grants made some sense as a form of stimulus, but now that the market is in good shape it will simply drive prices higher.
And finally, there’s the family home guarantee to help single parents buy a house with a deposit of only 2%. Again, this may help give some single parents a “leg up”, but it’s important to realise that the single parent then needs to make repayments to cover a loan worth 98% of the purchase price. Given that the scheme is only available to people who earn less than $125,000 and that the applicant needs to earn enough to make the repayments on a loan of 98% of an Australian house price, it is a safe bet that few single parents will be popping the champagne corks any time soon.
Australia has some of the most expensive housing in the world and none of the budget’s housing affordability announceables will lower house prices, for the simple reason they were not designed to. Falling house prices would be a political nightmare.
If government did want to make houses cheaper, it would need to remove the capital gains tax exemption that ensures when a $10m house goes up in value by 10%, its owners pay zero tax on their $1m windfall.
If government wanted more people to own their own home, then it would have to reduce the tax benefits for buying investment properties for the simple reason that you can’t have more investment property owners without having more tenants.
And if government really wanted to help single parents, retirees and low-paid workers who can’t afford a house, it could build a lot more public housing, and increase rent assistance.
But fear not, existing homeowners, none of these things are going to happen. And even if house prices ever did start to fall, I assure you that governments will find a way to try and push them back up. All the talk of making housing “affordable” is a simple smokescreen for ensuring that it’s not.