First home buyer grants bite the dust

The late-1990s and early-2000s were full of housing policy blunders, which helped fuel the explosion of Australian home prices.

In 1999, the Federal Government halved the rate of Capital Gains Tax, which encouraged (in concert with negative gearing) a surge of negatively geared property investment. This blunder was followed by the introduction of the $7,000 first home owners’ grant (FHOG) in the early 2000s, which similarly helped to push-up prices by boosting demand.

On the supply-side, all of Australia’s states and territories embarked on (or strengthened) urban consolidation policies, for example by errecting urban growth boundaries, imposing up-front development/infrastructure charges, slowing land release and development approval times, and inadequately funding housing-related infrastructure.

Gradually, however, Australia’s conservative state governments are unwinding the mistakes of the past.

In June this year, the Victorian state government announced that it would extend the Urban Growth Boundary (UGB) by 7,000 hectares, effectively opening-up enough land to accommodate an additional 100,000 people. The move to expand Melbourne’s urban footprint follows the previous government’s belated extention of the UGB by 41,000 hectares in 2009, which opened up enough land to accommodate an extra 284,000 homes and contributed to the current (belated) surge of housing construction.

In the New South Wales State Budget, the Government announced that the existing $7,000 FHOG would be abolished on 1 October 2012, replaced by a $15,000 grant for purchases of new properties up to $650,000. The Government also extended the first home owner stamp duty exemption to new homes valued up to $650,000 (up from $600,000 previously), and announced that it would now also offer a New Home Grant of $5,000 to all non-first buyers of new properties up to $650,000, and vacant land up to $450,000 from July 1, 2012.

In addition to the cash grants, the NSW government announced that it would establish a $561 million fund to pay for road and sewerage infrastructure in new housing estates, which is explicitly aimed at further stimulating housing supply.

Now it has been revealed that the upcoming Queensland State Budget, which will be released tomorrow, will follow New South Wales’ lead and end the $7,000 FHOG on pre-existing homes on 11 October 2012, and replace it with a $15,000 grant to first-time buyers purchasing newly-constructed properties up to $750,000 from September 2012.

The changes in New South Wales and Queensland are good policy, and should go along way to stimulating new housing supply, which has been trending down for over a decade despite higher home prices and population growth (clear evidence that the housing market is not functioning properly):

Since the pre-existing $7,000 FHOG will be removed from established homes – which make up the bulk of home sales – and channeled into increased grants for newly built homes, the impact of the policy changes are ultimately likely to be deflationary.

However, first-time buyers of pre-existing homes are likely to rush to beat the October expiry of the $7,000 FHOG on established dwellings, which could result in a short-term spike in mortgage commitments followed by prices in both New South Wales and Queensland, similar to what occured when the New South Wales Government announced, in early October 2011, that it would end the stamp duty concession on pre-existing dwellings on January 1, 2012.

Once fully implemented, however, the changes in New South Wales and Queensland should put downward pressure on home prices, as demand for pre-existing homes is reduced and new housing supply is stimulated.

Both governments should be congratulated for the policy shift, which offers to improve housing affordability by stimulating much needed housing construction.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

Leith van Onselen

Comments

  1. A small victory for common sense. They are rare and should be recognised celebrated.

    LVO, DC and the other stalwarts here should be given some credit for exposing this big dopey policy for what it is.

    But vigilance is required. When the RE lobby try this lunacy on again, (and they will) the response should be swift and targetted.

  2. constant gardener

    hmm…. do we really have a shortfall in housing that requires more houses to be built right now? How is this affecting house prices in any other way than to artificially prop up unsustainably high prices and lure more people into debt slavery at prices they can’t really afford… just when the great unwind is starting to pick up speed?

    • Constant, that is how its been sold in the past. However what is wrong with freeing up people to buy newer houses instead of some 50 year old house that has been renovated at least 5 times… Different perspective i know, but there are a lot of houses that should be knocked over that aren’t because its too damned expensive.

      Its not only quantity of dwellings but the quality that is the issue. Construction contractors have been squeezed because they’re seen as a variable cost, land as fixed. This has lead to even the new houses being substandard in ways, generally because they think they can force building contractors to become magicians when really all that happens is that the house is finished poorly.

      • Land is fixed….isn’t that the real crux of the matter? Land can go to zero or the moon, but I’d suggest that construction cost has less of a variable nature. Land Tax undeveloped land at 10% p.a. and let’s see how much of it stays ‘fixed’!

        • Janet agreed, having worked in the construction industry I always thought people’s expectations of how much people should get paid to sit on site and build for six months where a bit screwed. (to the lower side)

          After reading here the increase in prices is all to do with land, I started noticing how everyone blamed the builder rather than the land seller, who was not exactly doing anything quantifiable really(e.g. labour materials etc explains why it is so “fixed” its more subjective). Its very pervasive attitude and explains where there are so many developers churning out very low quality product.

          • That’s something you see constantly in online comments to MSM articles, people blaming ‘huge Mcmansions’ for the soaring housing prices, an attitude some of the various rent seeking interests in the industry are all too happy to promote, as it convieniently deflects blame from them.

            Maybe because it’s such a visually obvious thing, and a symbol of consumption that it gets targeted. It could also be a side effect of the shrinking block size making them look even bigger than they are. Certainly some greens, planners, latte drinkers, Elizabeth Farrelly, who hate the things, have also been quite happy to join the blame game in order to push an agenda of urban consolidation.

            It’s perverse of course, as inflated land prices are quite literally money for nothing, and as you say, the builders actually have to do something useful – build the house – to earn their money.

    • Yes there is a large shortage of houses/ units where people want to live as evidenced by the high rents and low vacancies.

      That doesnt mean prices cannot fall (as spruikers like to claim) nor that there are not lots of empty houses/bedrooms. It just means that there are not enough houses available for rent or purchase at reasonable prices.

      When rental vacancies are sitting about 3% and rents better reflect a reasonable proportion of incomes, property will be the boring subject it should be.

      Good to see that common sense is making an appearance in public policy. If it continues on that course we may find in 10 years we are discussing how remarkable it was that it took so long to understand how to acheive a sensible balance between regulation, urban quality and an affordable/ efficient property market.

  3. That $7k off the amount available for FHB of an existing property likely translates into $70K less in the offering price; mortgage gearing taken into account. Anyone ‘rushing in’ to beat the deadline might want to consider how much they will be able to sell it for when they eventually move on if in effect on 1.11.12 they will be $70k down, already.

    • I doubt those ‘rushing in’ to beat the deadline have the mental faculties to consider anything in their medium/long term future.

    • Within a few months of the home buyers grant in the US ending (which was also around $7000) the buyers were already worse off then if they had waited (as prices fell after the expiration).

      There was a lot of info on CalculatedRisk… can’t seem to find the linky at the moment. But its happened before!

  4. How about this for a change..

    No grants.
    No subsidies.
    No special tax treatment for property, or for first home buyers.
    No stamp duties.
    No urban boundaries.
    No zoning and planning red tape.

    Get the government out of the property business, they’ve made a mess of it.

    While we’re at it, end fractional reserve lending and abolish the RBA, the real culprit behind the housing bubble.

    • A required reading for you, a contemporary example of the consequences of laissez-faire economics.

      Death-trap apartment block just one of many

      I don’t know how people still believe that twaddle about “free” markets detecting and eliminating fraud on their own without government regulation, from the Patient Zero of Ayn Randianism, Alan Greenspan.

      Mind you, I am not for more regulation like that classic one about how to correctly open hot water bottles. But elimination of all regulation is just insane.

      • Yes, there is also a need for some personal liability for breaking the regulations and delivering unsafe, dodgy buildings.

        Too many building companies evaporate after each construction site is completed so there is no one to chase.

        But when supply is constrained and ‘getting stuff through council’ is an art form there is more room for the builder to get away with selling sub-standard rubbish for top dollar.

        Nothing wrong with cheap but safe housing as that may be all that some can afford. But unsafe, expensive crud is unforgivable.

      • You misrepresent laissez-faire economics. Only free-market zealots argue against rules in life-and-death situations such as fire safety.

        A high degree of competition in more simple cases is often the best solution. Govt restrictions often cause perverse outcomes. Take the example of taxis. Govt chokes the supply of taxis and taxi drivers are the lowest paid and worst drivers on the road.
        This is because the hard part is obtaining govt permission to run the taxi. The few that make it this far can choose the cheapest and most desperate drivers.
        In apartment blocks, govt chokes supply and fire death-traps are built and sold. Same principle.

        • You misrepresent laissez-faire economics. Only free-market zealots argue against rules in life-and-death situations such as fire safety.
          In my experience the privatisation of “life-and-death” things like fire fighting, prisons and healthcare are fairly mainstream views within the Libertarian camp.

          Take the example of taxis. Govt chokes the supply of taxis and taxi drivers are the lowest paid and worst drivers on the road.
          What places in the world are you thinking of where taxi drivers are highly trained and highly paid ?

          This is because the hard part is obtaining govt permission to run the taxi. The few that make it this far can choose the cheapest and most desperate drivers.
          However the problem here is not that standards for attaining a taxi license exist, but not enough of them are available. These are _distinctly_ different factors.

          In apartment blocks, govt chokes supply and fire death-traps are built and sold. Same principle.
          No, death-traps are built because greedy developers are trying to eke every last dollar out of their “investment”.

          • In my experience the privatisation of “life-and-death” things like fire fighting, prisons and healthcare are fairly mainstream views within the Libertarian camp
            Only because you haven’t been paying attention. There is a difference between privatising something completely (full ownership and funding by private organisations), contracting out services to private companies and providing a safety net for people who are unable to afford the private system (in the case of healthcare).
            You could easily outsource firefighting to private companies, the government still pays for it, private companies just tender for contracts. Companies that perform poorly or cut corners can be disgarded and replaced. Volunteer firefighters can still be raised by the government. This way you get the benefit of private sector efficiency, without having to worry about the issue of the service being a public good, thus not sustainable in the private sector alone.

            What places in the world are you thinking of where taxi drivers are highly trained and highly paid ?

            I have lived in Hong Kong and been to Singapore many times. The drivers are paid about the same as other workers (which isn’t much already but not the point) and they are almost always the best drivers on the road. There are far more taxi’s on the road and they cost a fraction of what they do over here.

            The Claw is 100% right about government choking supply of taxis over here. They restrict the number of plates and push the price up ridiculously (what are they now? $300,000?).

            Free-markets might not be perfect, but they are the best system we have and with sensible regulation along with government provision/funding of public goods and/or a safety net they are the best system we could hope for.

          • OK tried to do ‘quote’ tags, but failed miserably.

            Not sure how others do it.

            Mod: use the “em” tag instead for italics. You can use blockquote, but it has a nesting problem for future comments if too big

          • Matt, in the case of NSW property development, the certification process is already privatised and is done by private certifiers.

            As flat-chat Jimmy highlights, what is the point of certification if the certifier never sees the physical building before certifying.. in fact, they go out of their way NOT to see the building in order to avoid any liability.

            In this particular instance, the private certifier says he would have never certified if he knew the builder had put a roof over the atrium. Well, you need to a deliberately blind not to see that the atrium has an effing roof!! It is like the surgeon saying “operation successful, but the patient is dead”.

            I am not advocating that certification should now be done by the government, but that private certifiers should face the downsides of their dodgy certification and not escape with a slap on the wrist.

          • I will add to what Matt stated about the taxi drivers in Hong Kong and Singapore. Taxi drivers in Japan are very professional, the best drivers on the road, and they literally have a map of the region they work in their heads. They do not need to rely on the navigation system, or stop at the roadside to look up a map, or ask the passanger the way to go! It is what I would call professionalism, which appears utterly lacking in australia.

          • Only because you haven’t been paying attention. There is a difference between privatising something completely (full ownership and funding by private organisations), contracting out services to private companies and providing a safety net for people who are unable to afford the private system (in the case of healthcare). You could easily outsource firefighting to private companies, the government still pays for it, private companies just tender for contracts. Companies that perform poorly or cut corners can be disgarded and replaced. Volunteer firefighters can still be raised by the government. This way you get the benefit of private sector efficiency, without having to worry about the issue of the service being a public good, thus not sustainable in the private sector alone.
            It blows my mind after the near universal catastrophe of PPPs (pick pretty much any toll road) and contracting out work to private parties (Queensland health) anyone can even suggest they’re “efficient”.

            Efficient at funneling large amounts of public money into a small number of private hands, maybe (which is, of course, the point – privatise the profits, socialise the losses).

            I have lived in Hong Kong and been to Singapore many times. The drivers are paid about the same as other workers (which isn’t much already but not the point) and they are almost always the best drivers on the road. There are far more taxi’s on the road and they cost a fraction of what they do over here.

            The Claw is 100% right about government choking supply of taxis over here. They restrict the number of plates and push the price up ridiculously (what are they now? $300,000?).

            http://en.wikipedia.org/wiki/Taxicabs_of_Hong_Kong
            “The taxi trade is regulated by the Government, as are the fare scales. Taxis need a license to operate in Hong Kong. The government stopped issuing licenses in 1994, when there were a total of 18,138 in the territory. Existing licenses are transferable, and are traded on the open market, which is rising steeply. The going cost for a license is around HK$5 million.”

            http://en.wikipedia.org/wiki/Taxicabs_of_Singapore
            “Taxis are predominantly operated by large companies, the latter of which require a Taxi Operator Licence (TOL) from the Land Transport Authority (LTA). Holders of the TOL are required to comply with LTA’s Quality of Service (QoS) standards, codes of practice and audit directions, failure of which the LTA may revoke the licence.”

            “All taxi drivers in Singapore are required to hold a valid Taxi Driver’s Vocational Licence (TDVL) issued by the Land Transport Authority, after having met basic pre-requisites and successfully completed a training course in the Singapore Taxi Academy and passing a theory test. ”

            Free-markets might not be perfect, but they are the best system we have and with sensible regulation along with government provision/funding of public goods and/or a safety net they are the best system we could hope for.
            Indeed. So why do you keep arguing the Government should get out of regulating things ?

        • Instead of coming up with straw man analogies, you should stick to what you know best – calling random people “shortage deniers”.

          • isn’t using the term ‘-denier’ generally considered to be trolling behaviour? Why is it tolerated here from this claw character?

            Mod: The behaviour is not necessary and when repeated or off track, we delete the comments.

    • As to the gold as a currency, there are three problems with that. (1) Adopting the gold standard would mean that a government loses its privilege of printing its currency (and the implicit guarantee that a government can never go broke by debts denominated in its own currency). It is hard to envision a government relinquish its privilege. (2) If only one country adopts the gold standard, its currency would appreciate against the rest, and its exporters would go to the wall, which in turn worsens the terms of trade and outflow of gold. (3) If all major countries adopt the gold standard, that would freeze the exchange rates among all the major currencies. Unless the interest rates of these countries can somehow be synchronized, regardless of the economic cycles in these countries, it will create an even bigger problem than the use of fiat currencies.

      • People who push the Gold Standard forget one of the most fundamental laws of money. That being, it doesn’t matter what you use as the medium, money derives is value from faith that it will be accepted as the medium of exchange. The worth of each individual unit is determined by nothing but the total supply of units within the monetary system.

        All a gold standard does is massively reduce the supply of money with in the system which would result in nothing but price depreciation accross the board. This would limit the number of transactions that can be made within the system and reduce potential economic output.

        The system we have now is fine. The RBA control the money supply and are independent of the government. You only have an issue when the elected government puts pressure on the reserve bank to increase/decrease money supply to suit a political agenda rather than the needs of the economy.

        • I agree. That is the reason why the great depression during 1930s was much more miserable than the great recession (in the US) now. I see no point in abolishing the current fiat system. It will surely bring more harm than good.

  5. This isn’t as good as it sounds.

    Whilst placing a demand bias to new dwellings, if supply of land becomes even more strict, we get the worst of both world. Vendors motivated to NOT upgrade the quality of existing properties/rentals, and the increased deposit for new land being able to be leveraged up to a higher amount.

    Unless one state decides to make a grab for the under 30’s of the country and offer cheap land, thus offering arbitrage, we’re still beholden to the rent seeker.

  6. While finding some cause to support this move by Newman (and others), I remain concerned that Newman is on track to bring down Queensland housing prices the wrong way – by seriously squeezing the state economy.

  7. As Leith says, these policy initiatives are at least going in the right direction, but I personally doubt that the grants of $15K will be taken up in huge numbers, especially as new dwellings are often more expensive than equivalent older dwellings.I guess if you were looking at a 2 bedroom townhouse for 400K then the 15K might act as some sort of incentive. The same could be said for new 3 bedroom houses selling for circa 370K in outer suburban areas

  8. Here’s a good chuckle from todays Real Estate touting press..

    http://theage.domain.com.au/real-estate-news/best-streets-seddon-20120908-25kwt.html

    ‘Once known as Belgravia, Seddon was renamed in 1906 after the former New Zealand prime minister Richard Seddon moved to the suburb. Although he didn’t end up making Seddon his permanent home — later moving to Bendigo then back to New Zealand — the name stayed. Wider than Browning and Tennyson streets, Hobbs Street is lined with established trees and has neat, grassed nature strips.’

    Then go to wikipedia for some info on Seddon

    http://en.wikipedia.org/wiki/Richard_Seddon

    Richard John Seddon (22 June 1845 – 10 June 1906),

    He lived in Seddon earlier in his life, and ther suburb was renamed after him when he died.

    Good example of how they get their facts right……

    • And speaking of chuckles.I just read this on another site – ( re the Florida Land Bubble of 1920) “Eventually, however, there were no “greater fools” to buy the overpriced land, and prices began to adjust ever so subtly. Speculators realized there was a limit to the boom, and began to sell their properties to solidify their profits while they could.
      Then everybody simultaneously saw the writing on the wall, and panic selling ensued. With thousands of sellers and very few buyers, prices came down with a sickening thud, twitched a bit, and then crawled down even lower.”

  9. Of cause, the fact there are rent subsides on low ability to pay renters only adds to the situation of false gains in property rentals.
    The Federal Government has set a floor price for rentals and thus distorted real returns for negative gearers.

    • Yep, I would argue rent assistance as one of the big causes for overpriced real estate. 41% of all tenants receive it and it helps to maintain an ever increasing rental return.
      I would also argue that the NRAS has the same effect.

      • And don’t forget LAFHA (which is on its way out thankfully) for another government program to increase rental costs and give money to property investors.

  10. Leith – good one – but at best they could be described as incremental steps.

    The focus must be on –

    (a) eliminating artificial fringe scarcity values by ensuring adequate land supply.

    (b) financing infrastructure properly along the lines of the Texas Municipal Utility District (MUD) bond financing model

    Until these changes happen, we wont start seeing some elementary disciplines in our Local and State Governments.

    Late July New Zealand Deputy Prime Minister Bill English spelt it out to the http://www.interest.co.nz guys the approach they will be taking – WHOLESALE CHANGES TO HOUSING SUPPLY –

    http://www.interest.co.nz/property/60411/wholesale-changes-how-government-approaches-housing-affordability-it-drops-helping-de

    An announcement is expected October.

    I set out clearly what is required in Christchurch with CHRISTCHURCH: THE WAY FORWARD –

    http://www.scoop.co.nz/stories/AK1206/S00251/christchurch-the-way-forward.htm

    Its just a matter of “following the numbers” to identify where the problems are – knowing that starter stock is going in on the fringes of the affordable North American markets for about $US600 per square metre ALL UP.

    We are a million miles off the mark here in the Antipodes.

    Hugh Pavletich
    Co author – Demographia Housing Survey
    http://www.demographia.com
    http://www.PerformanceUrbanPlanning.org
    http://www.cantabriansunite.co.nz

  11. Good news and enjoyable discussions. But it’s always nice to visit MB for a bit of relief from the outlandish real estate commentariat.