COAG damns first home buyer grant

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The Council of Australian Governments (COAG) report into addressing housing affordability was released late yesterday and at first glance (will look in further detail later) is a reasonable document with a range of supply side recommendations aimed at freeing land supply, reducing land banking, reducing development costs and increasing market responsiveness that are all very welcome.

It also addressed the one demand side issue that it has some control over, the First Home Owners Grant, and concluded, also sensibly that policy is self defeating:

The HSAR Working Party found that the available evidence suggests that in its current form and in a supply-constrained environment, the First Home Owner Grant (the FHOG) may not be the most cost-effective way of improving housing supply and affordability in the longer term.

The FHOS was introduced on 1 July 2000 to provide assistance to first home buyers to offset the average impact of the Goods and Services Tax (GST) on home prices. The FHOS provides $7,000 to first home buyers who purchased either a new home or an established home.

The HSAR Working Party investigated the impact of the FHOG on the Western Australian and Tasmanian housing markets using econometric modelling. The modelling outcomes indicate that the state funded and administered FHOG and the time-limited First Home Owners Boost (the FHOB – introduced by the Commonwealth during 2001 and 2008) tend to increase house prices in both the short and long term. This price increase is more marked in the short term when supply is constrained.

Specifically, the findings from these case studies include the following:

• The FHOG and FHOB have encouraged first home buyers into the market (pull forward in demand), but the impact has been more marked for purchases of new homes than established homes.

– For example, in Western Australia the FHOB from October 2008 resulted in a 29.1 per cent increase in the growth of applications for new homes, while the half boost effective from October 2009 to December 2009, resulted in a 56.3 per cent increase in growth of applications for new homes.

• In the short term, where supply of housing is constrained, the FHOG can increase house prices.

– However, even in a supply-constrained environment, the HSAR Working Party’s modelling indicates that while the grants increase home prices, such increases are not as large as the grants themselves. To that extent, the FHOG does provide some help to potential first homebuyers in competing against existing homeowners, who have typically benefitted from capital gains from previous property price growth.

• The original FHOG had a lower impact on real house prices over time, largely because supply becomes more elastic over a longer time period.

In contrast to the FHOG, the FHOB was primarily designed to provide a short-term stimulus to activity in the residential construction sector as part of the Commonwealth’s $10.4 billion Economic Security Strategy. It played a crucial stimulatory role in responding to the acute economic downturn experienced during the GFC by boosting the turnover of property and supporting activity and jobs in the residential construction industry.

The extent to which the FHOG is achieving its intended purpose of offsetting the impact of the GST on housing has declined. These findings, together with the potential risks of housing stress resulting from the FHOG for some first home buyers when market conditions change, suggest that the scope of the FHOG could be reviewed and consideration given to better targeting the grant or even phasing out the grant completely.

In summary, the HSAR Working Party found that the available evidence suggests that, in its current form and in a supply-constrained environment, the FHOG may not be the most cost-effective way of improving housing supply and affordability in the longer term. The HSAR Working Party therefore recommends that as jurisdictions consider the future of the FHOS, they should take account of the HSAR Working Party’s analysis together with other relevant assessments.

It is important to note that any major changes to the FHOG must be agreed by all States and Territories and the Commonwealth.

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Spot on.

Final Report – Housing Supply and Affordability Reform

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.