FIRST-HOME owner grants are one of the biggest failures of government policy in the past 50 years, with the extra cash encouraging owners to bump up the selling price, making it harder for the young and those on lower incomes to get a foot on the housing ladder.
Leading economist Saul Eslake has attacked the policy of providing grants for first-home buyers, saying they have cost taxpayers more than $22.5 billion since 1964 and fuelled the fall in first-home owner levels to record lows of 12.3 per cent in November.
The grants had also stoked property ownership by the wealthy, with the top 20 per cent of income earners owning 36 per cent of Australian homes, Mr Eslake said.
In a personal submission to the Senate economics references committee, Mr Eslake, who is the chief economist at Bank of America Merrill Lynch, wrote a scathing criticism of the lack of affordable housing in Australia, caused by a fall in the number of homes built compared to the population increase.
Mr Eslake put the onus on Australia’s political leaders, saying there was more political capital in overseeing the increase in housing prices for the country’s eight million home owners. He was most critical of cash grants to first-home buyers, along with negative gearing, which he said had served to inflate the demand for existing housing while doing little to increase the overall supply.
The highest level of Australian home ownership appeared in the 1961 census, three years before the Menzies government initiated a first-home owners grant, Mr Eslake said.
“It’s hard to think of any government policy that has been pursued for so long, in the face of such incontrovertible evidence that it doesn’t work, than the policy of giving cash to first-home buyers in the belief that doing so will promote home ownership,” Mr Eslake wrote in the submission.
“Cash grants and other forms of assistance to first-time home buyers have served simply to exacerbate the already substantial imbalance between the underlying demand for housing and the supply of it,”
“I often think that these grants should be called ‘existing home vendors’ grants’ — because that’s where the money ends up.” The Menzies government introduced the policy of supporting first-home buyers with a means-tested grant of $500 in 1964. The grants varied over subsequent governments and were eventually phased out.
The Howard government re-introduced the policy in 2000, at $7000 a home, with no income test. A year later John Howard attempted to encourage construction by doubling the grant to $14,000 if first-home buyers chose new property.
The Australian residential market had boom-levels price growth in the early 2000s, with Sydney leading the way.
The Kevin Rudd-led Labor government added a boost to the grant in the stimulus package of 2008, with buyers of existing homes receiving $14,000 and new homes $21,000.
Price growth in the national housing market in 2009 has not since been replicated. Changes to first-home buyer grants in most states over the last 18 months – making them available for new homes – was belated but encouraging, Mr Eslake noted.
ANZ head of property research Paul Braddick said that the government needed to support the construction of new dwellings to make housing more affordable.
Century 21 Australasia chairman Charles Tarbey said the money spent on first-home owner grants should instead go to helping councils work with developers to fast-track housing.
Mr Eslake made his own recommendations to the senate submission, which included increasing the amount of government-funded dwellings, expanding Western Australia’s Keystart scheme nationally, reducing the cost and complexity of residential construction, and replacing stamp duty with a broadly based-land tax.
By Greg Browth The Australian Newspaper 21 Jan 2014
Original article here
Note: Why new home owners also need access to super for a home deposit, like Kiwi Super in NZ
The government should look at the GST on housing – currently it only applies to new housing and particularly to strata housing. The margin scheme is essentially finished (because the effect of inflation on the fixed cost base from 2000) so new home developers face an immediate 10% margin disadvantage against the existing housing stock which sets the prices. Lower cost housing has lower margins and this 10% plus the many local council charges levied simply as revenue generators on new development, mean margin squeeze is intense. The GST should be extended to the existing housing stock in place of stamp duty (the GST could be collected in the same way as stamp duty and paid to the collecting government).This obviously won’t decrease housing prices but it will make lower cost housing more economic and should see an increase in supply of new lower cost housing.
Eslake lashes out at ‘50 years of housing failure’
Leading economist Saul Eslake has issued a damning assessment of housing policy of the past 20 years, saying government self-interest has led to the worst affordability problem since the years immediately after World War Two.
While political parties profess to care about first-home buyers, the reality is they prefer to garner the votes of the 5.8 million owner-households that want policies that would increase house values, he says.
In a personal submission titled “Fifty years of failure” to the inquiry into affordable housing by the Senate economics references committee, Mr Eslake, who is also Bank of America Merrill Lynch’s chief economist in Australia, says housing stock had grown at a slower rate than the population in the past 10 years, for the first time since the early 1950s.
This is despite mortgage interest rates having been substantially lower, at an average 7.59 per cent over the past 20 years, compared with 11.95 per cent in the preceding 20 years.
Coupled with unprecedented expenditure on first-home buyers’ grants, the overall home ownership rate fell five percentage points to 67 per cent at the 2011 census, its lowest since the 1954 census.
“Politics – more than any other single factor – means that Australians are likely to have to live with a dysfunctional housing system for a long time yet to come,” Mr Eslake says in the submission, a reprise of his Henry George commemorative speech last September.
Government policies, including cash for first-time buyers and negative gearing, have inflated demand while doing little to increase the supply and therefore made affordability worse, he says. Business leaders have called for an overhaul of negative gearing to make it fairer.
These policies have to be abolished and funds redirected towards constructing supply, along with grants, loans or tax incentives to developers to increase the proportion of affordable dwellings within developments, he says.
Other ways to increase supply include replicating Western Australia’s Keystart scheme, which helps people to become home owners on a shared-equity basis.
The scheme replaces stamp duty on land transfers with more broadly based land taxes and higher rates for undeveloped vacant land in established urban areas, reduces upfront charges for developers for greenfields projects, and simplifies approvals for former industrial sites.
Number of people per dwelling rising
Transport and roads infrastructure for greenfields sites could also be better funded through levies on the increments to the value of the land which result from such investments in the same way a levy funded the Melbourne Underground Rail Loop Authority in the 1970s and early ‘80s, Mr Eslake says.Between 1947 and 1961 housing stock increased 50 per cent, outstripping a population increase of 41 per cent. Between 1961 and 1976 housing rose a further 46 per cent and population 33 per cent. But things changed after 1991, with figures backing up angst among baby-boomer parents about how hard it is to get their adult children out of the family home, Mr Eslake said. “The average number of people per dwelling actually rose (from 2.61 to 2.64) between the 2006 and 2011 censuses – for the first time in at least 100 years.”
The current circumstances contrasted the success of federal and state government housing policies between 1947 and 1976 which had increased housing supply and home ownership rates.
Public agencies have built an average of less than 6000 new dwellings a year since early 1990s compared with about 12,379 dwellings a year between the mid-1970s to the early 1990s.
State and local authorities also imposed increasingly “onerous” requirements on developers to provide infrastructure and services in new housing estates.
Upfront charges on developers meant developers found it increasingly difficult to produce house-and-land packages that are affordable for first-time buyers and still make a profit.
“So they have reacted by building a smaller number of more expensive houses targeted at the trade-up market,” he said.
Tighter planning controls by authorities and local governments, and greater opportunities for objections and appeals against decisions added to the cost and time lapse for higher density development.
20th Jan 2014 Australian Financial Review
Original article here