Earlier this year, the New South Wales (NSW) Government made the sensible move of abolishing the $7,000 first home owner’s grant (FHOG) on pre-existing dwellings and channelling the funds towards an expanded FHOG that applies to buyers of newly constructed dwellings only.
The move by NSW appears to have set-off a chain reaction. A few months after the NSW Government’s decision, the Queensland Government adopted the same policy, ending the FHOG on pre-existing dwellings in favour of an expanded grant on newly constructed homes.
Yesterday, the South Australian (SA) Government announced similar changes, with the FHOG on pre-existing dwellings to be wound-down in favour of an expanded grant on newly constructed homes, in addition to offering a raft of other incentive to buyers of new housing:
NEARLY all buyers of newly built homes in South Australia will be eligible for a State Government grant of up to $8500, Premier Jay Weatherill said today.
The New Housing Construction Grant will now be extended from just first home buyers in a drive to boost the ailing building construction industry.
However, in a sting to the market, first home buyer grants for established homes will be cut, then eliminated.
With the new and changed existing grants, new home buyers could gain up to $23,500.
This benefit would grow to $36,330 from stamp duty relief if buying a city apartment off-the-plan…
The new grant will replace the current arrangement where first home buyers can apply for a First Home Bonus Grant – for a new house they are ordering or which has been newly built.
The new grant forms part of a package of reforms, under which:
* The New Housing Construction Grant is created for all buyers on properties worth up to $400,000. It will then phase out from $8500 to zero on houses worth $450,000 or more. The new grant will be available until June 2013.
* The First Home Buyers Grant will be increased from $7000 to $15,000 for first home buyers purchasing a newly built home.
*The First Home Buyers Grant will be reduced from $7000 to $5000 for first home buyers buying an established home. The grant will expire completely on June 30,2014.
Mr Weatherill said the cut was an unashamed push to boost the construction sector…
The motive behind the move – to boost the SA construction sector – is understandable in light of the sharp deterioration of the SA jobs market, whereby -10,000 jobs have been lost over the past year (see below chart).
Around half of these job losses have come from the construction sector, which shed -5,000 jobs in the year to August and has lost -11,900 jobs since employment in the sector peaked in November 2010 (see below chart).
The key cause of the loss of construction jobs is the slump in residential construction, which has been in free-fall since late-2010 (see below).
Land prices in SA have simply become too expensive, with SA now offering the smallest lot sizes in Australia at prices comparable to Australia’s larger and more dynamic capitals (see below table).
As such, new house sales have collapsed to the lowest level on record, according to the Housing Industry Association (see below chart).
While the new home incentives should help in creating construction jobs by spurring demand for new housing, they do nothing to fix the core of the problem – artificially inflated fringe land values brought about by a decade of urban consolidation policies implemented by the SA Government. These policies have acted to reduce the available supply of land, encouraged land banking, and forced-up the cost of land in and around Adelaide.
In this regard, the SA’s new home incentives are more about treating the symptom of high land prices rather than addressing the cause.
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.
