The brutal truth on housing. Someone has to lose in order for first homebuyers to win

You can’t help first home buyers without making other buyers worse off, writes …

Brendan Coates, Grattan Institute and John Daley, Grattan Institute

On housing, the contrast between the two major parties couldn’t be clearer. Hände Schützen Haus

The Coalition is still pretending that you can help first homebuyers without hurting anyone.

Labor isn’t.

This matters, because Australian governments have been pretending for decades that there are easy and costless ways to make housing more affordable.

And over that time the problems have become worse.

The Coalition’s First Home Loan Deposit Scheme is the latest plan that is supposed to arrest the decline in home ownership among younger Australians.

The Coalition’s First Home Deposit Scheme

Housing costs are a big problem for young people.

Home ownership is falling fast in Australia, especially among the young and poor.

Fewer than half of 25-34 year olds own their home today.

Home ownership among the poorest 20% of that age group has fallen from 63% in 1981 to 23% today.

At this rate almost half of retirees will be renters in 40 years time.

Saving a deposit is the biggest hurdle.

In the early 1990s it took six years to save a 20% deposit on the average home.

Today it takes 10 years.

That’s bad news for younger Australians without access to the “Bank of Mum and Dad”.

The Coalition’s new plan seeks to arrest the decline by lending would-be buyers up to 15% of the purchase price, provided they’ve saved at least 5% for themselves.

It would also mean that single first home buyers on less than $125,000 a year, or couples earning less than $200,000, could save $10,000 or more by not having to pay the lenders mortgage insurance that is normally required when a purchaser has a deposit of less than 20%.

There would be a cap on the value of homes purchased through the scheme, still unannounced, which would vary by region.

The Coalition is budgeting just $500 million for the guarantees.Home Mortgage Concept

Labor was quick to match the scheme, partly because it doesn’t cost very much (unless there are unexpected losses).

Most likely, the scheme won’t have much impact.

It would increase home ownership, but only a little

. It might also push up prices – but by even less. Some people saving for their first home might buy earlier.

Others just priced out of the market at the moment could afford to pay a little more for a house given that they would not have to pay lenders mortgage insurance.

Most of those taking up the scheme would probably have bought anyway.

Those with access to the Bank of Mum and Dad already have already been able to use such a scheme.

And the income thresholds are set too high, cutting off only the top 10-15% of income earners.

The New Zealand scheme, upon which the Coalition’s plan is based, cuts out at incomes of only $85,000 for singles or $130,000 for couples.

The biggest barrier for many first home owners isn’t the deposit. Mortgage Calculator, House And Key With Calculator

Their problem is qualifying for a mortgage when banks assess their ability to repay the loan assuming an interest rate of 7%, much higher than the typical 4%.

The Coalition has capped uptake at 10,000 loans every year, or about one in every ten loans (based on loans last year to first homebuyers).

Even if none of them would have bought a home without the scheme (most unlikely), home ownership would be only 1% higher in a decade’s time.

But a bigger scheme might well be worse.

If it “succeeded” in rapidly expanding demand from first home buyers, it would push up prices for everyone, not least all the other first home buyers trying to get into the market.

Instead of being ineffective, it’d become counterproductive.

And the bigger the scheme, the greater the risks of dodgy lending, which could leave the government on the hook if buyers default.

The underlying problem with the Coalition’s latest plan – like the First Home Super Saver Scheme it introduced in 2017, or the Howard and Rudd Government’s first homeowners grants – is that it tries to fix the housing affordability problem by adding to demand for housing. piggy bank

Because it costs the budget less, the new scheme is less bad than its predecessors.

But it shares their critical flaw: it pretends we can make housing more affordable without hurting anyone.

Its political virtue might be that it sends a signal to first home buyers that government is on their side.

Yet the Coalition won’t pursue the one thing happen that would actually help home buyers the most: letting housing prices fall.

Labor’s negative gearing plan

Labor’s plan to abolish negative gearing on existing homes and halve the capital gains tax discount creates losers.

Labor would prevent new investors in existing homes from writing off the losses from their property investments against the tax they pay on their wages.

And investors would pay tax on 75% of their gains, up from 50% now. Negative Gearing

Its plan takes away tax breaks worth $1 billion to $2 billion a year in the short term, and more in the long term.

Existing homeowners would lose a little: The Grattan Institute estimates that house prices would be 1% to 2% lower under the Labor plan.

The Commonwealth treasury and NSW treasury have reached similar conclusions.

Prospective investors who had planned to buy and negatively gear an existing house would miss out on a lot.

Some might buy anyway, others wouldn’t.

Despite the noise, the bulk of these people would be among the top 10% of income earners.

By reducing investor demand for existing houses, Labor’s policy could provide a genuine boost to “genuine” home ownership, by owner occupiers.

Fewer investors would mean more first home buyers winning at auctions. 34079710_l

Recent restrictions on lending to investors imposed by the Australian Prudential Regulation Authority have already resulted in an increase in the share of lending to first homebuyers.

Labor’s policies would accelerate it.

The bottom line on housing?

Changing rules on negative gearing and capital gains tax is more likely to increase home ownership than guaranteeing part of the deposit.

But no policy proposed in this Commonwealth election affects the really big lever for home ownership: increasing housing supply.

Brendan Coates, Fellow, Grattan Institute and John Daley, Chief Executive Officer, Grattan Institute

This article is republished from The Conversation under a Creative Commons license. Read the original article.


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'The brutal truth on housing. Someone has to lose in order for first homebuyers to win' have 2 comments


    May 15, 2019 Charles Litho

    The only problem about the cost of housing in Australia id Governments creating a situation that the essential elements of life are used as items to tax heavily. We are seeing everything Australia has in surplus to need have their price increased to make them un-affordable. Expect to see a salt tax in your local supermarket soon; and, the crime of stealing salt from the sea. Certainly we need Governments with the funds to run the country, but, doing it in ways that undermine productivity and creating shortages is just stupidity. Having 3% of Melbourne as areas available for higher density housing is only a dream; as we run towards the Murray River with new estates of single storey houses on 300 square metre blocks.
    The Stalinist mentality of the political system that seeks to provide benefit only to a select group, has its days numbered. I only heard a comedian this week mention the fact that children are going hungry in Australia; no political group recognises these children as being Australians. We are breeding our enemies to a democratic liberal free enterprise system.
    Thirty years ago I sat in front of the former Prime Minister, Malcolm Fraser, begging the audience to join any political party and take control so that its policies are all about benefiting Australians. The existing political parties where members have no say on its policies are no different to other Stalinist political parties around the world.
    We have nothing to lose but unproductive practices that will bury the free enterprise system. We should not treat people who are productive and work long hours as enemies of Australia; they should be our heroes.



    May 15, 2019 Ben

    I agree with all this. but we are not actually considering “losses” but rather reductions in profits. In essense our future government needs to spread the profit reduction over as many people as possible. Also, in a falling market, lending 95% at higher interest rates, is clearly an increased financial risk for both financiers and mortgagees: my view of this is its ridiculous. It would be better to do a combination of increase the term of the loan to reduce repayments and reducing the negative gearing over time rather than all at once as well as promote new inner city affordable (+liveable, + sustainable) housing with plot ratio bonuses. Private development funds and consortia also need to be promoted, so that investors can move from investing in old inner ring single houses to investing in new medium density development, and without the need for bank funding. If anyone wants to try this now, check out my linked in page, and private mail me.


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