Expect a massive first home buyer bribe in this year’s Budget

By Leith van Onselen

Today, I want to explain why I expect the Turnbull Government to unleash some kind of first home buyer (FHB) stimulus in the guise of “housing affordability” in the upcoming May Federal Budget.

1. We have already received some hints:

Last month, Michael Sukkar, whose responsibilities include housing affordability, refused to rule-out speculation that the Turnbull Government would make mortgages tax deductible like they are in the United States:

Asked whether the government would consider adopting the US system where owner-occupiers deduct the cost of their mortgages from their tax bill, Sukkar said there was no “silver bullet” for housing affordability, including that option.

… asked to rule out allowing owner-occupiers a new tax deduction to compete with investors, Sukkar said only: “I will examine, and I know that the treasurer will look at, all good ideas…Asked if the owner-occupier deduction was under active consideration, a spokeswoman for Scott Morrison told Guardian Australia: “Housing affordability will be an important policy focus of the Turnbull government in this parliamentary term.”

2. The Coalition is desperate to counter Labor on housing affordability:

Speaking separately last month, Michael Sukkar and another Coalition representative admitted that the Turnbull Government is desperate to be seen to be doing something to address Australia’s woeful housing affordability:

Mr Sukkar insists the housing crisis is an “extraordinarily high” priority for the Prime Minister.

That view was reinforced by another government source, who said the Prime Minister wants to be seen to be acting on this issue.

“Malcolm is genuine in wanting to see something done on housing affordability, but it has also become too much of a hot political topic for us not to be seen to be acting in this space,” the source said.

“We need something to help turn the polls around, and if we can make progress with housing, it could be a win-win situation”…

Offering support to FHBs, under the guise of “housing affordability”, would give the Coalition a platform to counter Labor’s proposed changes to negative gearing and the CGT discount.

3. The Coalition knows it must stimulate housing to keep the economy growing:

With this housing cycle already five years old, and long in the tooth, the Turnbull Government will know that it needs to keep the boom in prices and construction, as well as turnover, going if the economy is to continue growing, even if it sows the seeds of a bigger correction down the track.

The last thing the Turnbull Government wants is for the housing market and economy to suffer a correction on its watch – i.e. over the next 2-plus years – and in the process be tarnished as ‘bad’ economic managers in the same way that Labor was following the GFC.

Far better for the Coalition to juice housing now, kick the can down the road, and let the market and economy correct once Labor takes power in 2019. Then Labor will be blamed, rather than the Coalition, entrenching the view that Labor cannot manage the economy.

4. Stimulus is supported by the Property lobby:

We already know that the Turnbull Government is heavily influenced by the property lobby. Treasurer Scott Morrison was the National Manager, Policy and Research, at the Property Council of Australia (PCA) between 1989 and 1995. The Turnbull Government’s various arguments against negative gearing reform were also based on the PCA’s and broader lobby’s input.

The Real Estate Institute of Australia (REIA) has also recently lobbied for FHB bribes, including:

  • subsidies to purchase both existing and new dwellings; and
  • allowing FHBs to access their superannuation to purchase a home.

Therefore, some sort of demand-side stimulus aimed at FHBs would satisfy one of the Coalition’s key backers.

What form could Budget stimulus take?

I see three options, though there are probably others:

  1. Making FHB owner-occupier mortgages tax deductible;
  2. Allowing FHBs to access their superannuation for purchasing a home; and
  3. Direct FHB grant, similar to those used in the wake of the GFC.

When speculation of making owner-occupied mortgages tax deductible was couched last month, the Grattan Institute’s John Daley responded by claiming it would cost the Budget a massive $19 billion in revenue forgone.

Therefore, if the Turnbull Government was to proceed with this policy, it would probably limit it to new FHBs only, therefore limiting the financial impact.

The beauty of this approach from a political perspective is that it would overcome one of the key criticisms of negative gearing: that it biases investors over FHBs. It would also provide voters with a clear alternative: Labor’s unwinding of negative gearing (and falling house prices) versus the Coalition’s expansion of negative gearing to FHBs (and rising house prices).

Allowing FHBs to access their superannuation is also a likely proposition. Many commentators – including Joe Hockey, Nick Xenophon, Robert Gottliebsen, Harry Triguboff, CEDA, and the REIA – have backed this policy, so the Coalition certainly could find support. FHBs are also unlikely to value their superannuation savings – given they can’t access it for decades – so many would see it as ‘free money’.

The last option – a direct FHB grant – seems the least likely in my view. It has been tried in the past and failed as an ‘affordability’ measure, so I reckon the Coalition would go for something new.

Would a FHB bribe improve housing affordability?

Definitely not. If history has shown us anything, it is that demand-side stimulus does not improve housing affordability and are largely self-defeating, since they are soon capitalised into higher house prices. In the meantime, the Budget or people’s retirement savings are put under increased pressure for no apparent gain (other than to existing property owners, who benefit from higher values).

Ultimately, addressing housing affordability requires a combination of policy measures aimed at both the demand and supply sides, including:

  • tax reforms – e.g. unwinding both negative gearing and the CGT discount, as well as swapping stamp duties for land taxes;
  • supply-side reforms – e.g. freeing-up land-use and planning;
  • greater investment in infrastructure;
  • greater investment in public housing;
  • clamping down on foreign speculators via expanding money laundering laws into real estate and properly policing and enforcing illegal foreign buying of established dwellings;
  • tightening capital rules;
  • tightening rules allowing super funds to leverage into housing;
  • laws to give greater tenancy and security to renters; and
  • reducing immigration to sensible and sustainable levels.

Unfortunately, the Turnbull Government has already shown that it won’t address the real issues and is more likely to resort to self-serving gimmicks and smokescreens to give the impression that it is taking action, while actually supporting further house price inflation.

Will voters take the bait?

Gee I hope not. But given the shortsightedness of Australians, I wouldn’t rule out them taking the bait even though they shouldn’t.

If this long-running housing bubble has shown us anything, it is that Australians are not rational when it comes to housing.

I sincerely hope that I am wrong and the Turnbull Government does not stimulate housing in the upcoming (or any future) Budget. But I have this sneaky suspicion that it might.

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Leith van Onselen
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Comments

  1. Why not just allow home owners to deduct all expenses related to the ownership of their properties including interest??? For silly buggers like me who own outright, we have no benefits either way otherwise. But allow me to claim for the maid service, pool cleaner, landscaping service and by jove, I will be spending like no tomorrow to save those 47 cents on my tax!!!!

    Yeah, no…. I would just mortgage the property to the hilt, and throw the ill-gotten gains into another property I don’t need and can’t rent out thus driving prices up further as I join the BB’s in this rush to riches. Or more likely, I would sell up, throw the cash offshore and move to a country that is taking steps to move from a third world backwater to first world like status and not the other way round…..

  2. I bet John Alexander won’t be asked for his opinion. He was trying to solve a community problem, not wedge for votes.

  3. “Treasurer Scott Morrison was the National Manager, Policy and Research, at the Property Council of Australia (PCA) between 1989 and 1995”
    Mr Morrison seems embarrassed with his tenure at the PCA.
    Last year, he had his tenure at the PCA clearly written into his LinkedIn profile, then it was altered to a “marketing consultant” during the period 89 to 95, and now his CV on Linkedin has omitted that period altogether.
    https://www.linkedin.com/in/the-hon-scott-morrison-mp-8b410347/

    • Nice research that. After all who wants a glorified real estate agent running the nation’s books?

  4. They will do FHB Grants. Absolutely 100% going to happen . And if prices fall for recent speculators they’ll do the same. (if labor is in they’ll also do it). All governments in Aus would do it. They’d be totaled if they didn’t. That’s what the punters expect & demand. Yes yes

  5. So, what to do when you’ve got a grotesque housing bubble, swallowing the whole economy and destroying the whole moral fabric of society? When a whole generation is locked out, unless they have won the genetic lottery? But of course, there’s nothing else TO do but blow that bubble much bigger. And of course find a way to get that locked-out generation into the game whilst still expanding that bubble to the max. Genius! No wonder we’re the clever country.

  6. Why not print money and give FHB’s a billion dollar first home buyers grant?

    If each him buyer had a billion dollars, that would set a new floor fir home prices.

    Imagine how rich we’d all be.

  7. Just wondering, from a federal perspective, how is a FHB defined in Australia when it is the states that hold all the data?

  8. The impact in Melbourne and Sydney would be modest unless we were talking 100 + K outside those locations then yes could slow the slow down.

    But you know what, its past the peak the banks know it and I think the only ones that are still 100 percent fixated are those leveraged investors. So I think that this will get investors fired up again !

  9. That would be so awesome! I hope it’s deductible interest – I would rape the hell out of something like that. With a clear conscience, too.

  10. The budget cannot afford this, and Treasurery will go rogue and leak the hell out of any proposals. Besides, any policy will have to pass the senate and quite possibly a new paradigm in the Reps. This could take 6 months or more, by which stage the apartment market will be dire along the east coast…People will be avoiding the market.

    I’m an optimist at heart

  11. When Turnbull was Communications Minister in 15 i seem to recall him calling Super for housing ‘an extremely bad idea’ or words to that extent.

    They still may do it, but he could get slayed for it. But hey, didn’t stop him on NG and CGT.

  12. TailorTrashMEMBER

    And let’s make sure all our brand new citazens who buy their first home in Australia get it tax deductible too ……I can’t imagine the rorts this will bring …….parents sell their houses and give the money to their 5 kids for each to buy their first homes …all tax deductible ….. Reusa will be in paroxysms of delight …….and will the government see the rorts ?….yes as they always do …..2 years later after billions washed down the sluce …….

  13. TailorTrashMEMBER

    ……and how nice that those first home buyers will be able to get a job at Coles to help with the even bigger mortgages they will need to take out to get a home further pumped by these FHB moves ………..looks like the supermarkets are finding the robo checkouts are blind to carrots (they must have the vitamin A gene missing ? ) ………who could have guessed this would happen ?
    http://www.bbc.co.uk/news/world-australia-38919678

  14. If something like this is coming then it’s time to load up on entry level properties in those cities which haven’t recently boomed (I’m thinking Adelaide, Brisbane and Perth). Not even joking.

    But I hope for affordability sake that you are wrong Leith.

  15. Joe Hockey told us to get a better paying job. Malcolm will be telling us to get more debt. Because the lack of mortgage debt in Australia is the main problem we all face. If we could all access more debt that would solve everything. In mean, let’s face it, that would amount to a meaningful and real change from what has been going on for the last couple of decades. And why can’t we access more debt presently? That’s right: because the interest costs are too high. It is all becoming so clear to me. If we make that interest deductible, it will be onto the sunlit uplands.

    *Sigh* To paraphrase Churchill: you can always trust politicians to do the right thing … once they have tried all the other alternatives.

    I remember having a discussion with an ex-business partners about debt. His view was that you should take on as much financial debt as the bank would lend you, as if that were the only relevant criterion. While I accept that financial debt is a useful tool, any debt, financial or otherwise, is inherent with and impacts upon the relationship between the parties concerned. So while I would certainly not wish to borrow more than the bank was comfortable to lend, I did not wish to borrow more than I was comfortable to borrow. As it turned out, those were rather different thresholds.

  16. Even if they try this, I don’t think it will help much. When you have a $1M home and need 10% deposit that’s at least $100k. I’d wager a guess that most Australian’s looking to buy their first home don’t have $100k saved. I’d also say their Super funds are not that large either? Maybe $50-$80k at most?

    When prices for humble abodes are already $500k (for town houses / apartments in outer suburbs) and anything with decent amenities is $1.2M and close proximity to the city. I think it’s a drop in the Ocean. I do think prices could rise further, but that will just make it harder and harder for first home buyers in the not too distant future.

    Also with higher prices = higher stamp duty. That’s a killer. I was looking at a 1.2M place in Melbourne and the stamp duty alone was something like $70k…

    I sincerely hope that most Australian’s see it for what it is and vote for someone else like labour to smash negative gearing and half capital gains tax instead.

    • An additional $50,000 deposit would probably be leveraged 5-20x (depending on LVR and servicing ability). Don’t underestimate the impact of something like this being implemented. Even if it doesn’t do much in Sydney / Melbourne it is likely to have a large impact on all the other capitals…

    • Indeed. How much slack is left with the FHBs. They’re already investors if they can afford anything. What you do have is high income renters who’d probably take the deductability bait shrinking the pool of tenants.

      • based on anecdotes, I can say that there is no slack at all in the FHB category, the 90% of those who had serviceability have loaded up on “FHB-stay 6 months-move out become investor” game. The rest 10% who have serviceability have stayed out for whatver reasons (many being economic foresight!). If you are a non-home-owner and have no serviceability then you cannot be classified as FHB, it is similar to saying “Pete erans 50K a year and he wants to buy a 2017 Ferrari, yes he is a prospective-ferrari-buyer!”

  17. Despite my already low levels of faith in people, I don’t want to believe they’d really do something demand-side. We already know it would increase base cost, so repayments would be suicide level high after just 2 rate hikes.

    • Which is why MB’s permabear readers should cheer this on. Accelerating that much harder into the wall will make the crash all the more devastating – so much so that even the boomers will suffer.

      • Time flies. I don’t want to cheer something on that might take away the youngest, best years of my life. An 18yo today can go through a 10 year recession and they’ve still got a chance. If I go through a 10 year recession, I’ll be competing with people younger and ‘hungrier’ than I am.

        I’d rather everybody just be a little more introspective and ask themselves (1) how secure is their job REALLY, (2) how long can they go without a job? (3) What it would take for them to either lose their job, or be in a financial position that is really backwards.

        The problem with people who’ve only ever lived in the first world, is that they genuinely believe there is a difference between first/3rd world as dictated by some natural law. That the nations of today will never fall, that other nations will never rise. If people realised that first world nations are only the product of (1) infrastructure, (2) education, (3) culture, they might put a little more effort into ensuring our infrastructure is funded for reasons other than campaign season, that our education isnt messed with to benefit a few, and that our culture…actually I have nothing for culture. I don’t want Australia to become classist but trying to ‘lock in’ culture is usually counter productive too.

  18. Its called housing affordability – and the election will absolutely be fought on THOSE TERMS.

    None of these suggestions will impact house prices to make them more affordable – they will simply allow FHB to leverage into a skyrocketing housing market.

    Housing affordability is housing affordability – not leveraging your retirement for a place to live.

    The ALP will destroy the LNP on these suggestions.

    FHB will cost the budget.

    Mortgage deductions will cost the budget.

    Super will cost them their life savings.

    Now the suggestion you are running with the most is mortgage deductions for FHB. The reality is that if they offer this – then they absolutely MUST offer it to renters.

    There is no difference between a business cost in buying the house and renting it – there will be an absolute SHIT STORM if the poorest, least able to afford a home are punished even MORE, while the kids of rich parents get ANOTHER tax deduction.

    LNP will get smashed to kingdom come with these suggestions.

    .

  19. This will be eyewateringly expensive, and I doubt Treasury will do this without a crap load of leaking. I also doubt it will be a fast process. Something this big will have to clear both houses. Besides the intransigence of the senate, which is a given, the Reps will not be plain sailing either. It will only take a few LNP malcontents to scupper this, and there will be trust me.

    Expect half a year of this being raked over the coals before fizzling out. By that stage it will be too late anyway for the apartment market along the East Coast.

  20. I wonder what headwinds the government will run into as they roll this out? Previous FHB stimulus has been introduced in a much more benign environment. It’s hard to recall any negative public comment when the FHBG was introduced in 2009, apart from Steve Keen and possibly the MB bloggers (if they were writing on the subject at the time). This time around there will be some vocal and credible opposition. Not to say it won’t happen, but it won’t be a free ride for the government as it was for Rudd and Howard.

    • Mining BoganMEMBER

      I was ranting about the first grant Howard gave out and even more when that idiot Rudd did it and I can vouch that very few understood the damage it would do.

      The only ones who did get it were investors multiple times over. Their sly smirks gave them away. They knew it was about boosting house prices but they weren’t going to say anything. Everyone else just cheered blindly. I expect the same result if they try it again.

  21. I’ll be livid if they do any sort of demand-side subsidy or rebate. If you’re going to spend my taxpayer dollars, spend it measures that add supply, not measures that stoke demand.

  22. Diogenes the CynicMEMBER

    Surely this triggers a rating downgrade? Or is this a smokescreen for some nasty things coming up in the Budget?

  23. It’s 5am.
    The clubs are closing.
    Something doesn’t quite feel right.
    And yet you instinctively want to keep partying.
    You realise that if you keep this up the come-down is going to be far worse than the one you’ve currently lined up for yourself.
    Decision time.

    Do you
    a) admit you’ve been excessive but that the sooner you finish shorter the period of suffering. Plus you better go to work on Monday as you’ve noticed that things are getting a bit hairy for the company.
    b) try to figure out how much booze will be needed for the slow melt back to reality. You can call in sick on Monday, everyone does it. Sure, you haven’t finished the report that was due last Friday but what is one more day.
    c) call up Pablo, ask for one of everything and tell him to put it on your tab. Consequences be damned.

    I’m pretty sure that this government is going to call Pablo. Consequences be damned. This party ain’t stopping while they are seen to be in charge.

  24. It’s going to be this one –> Allowing FHBs to access their superannuation for purchasing a home; |

    I had expressed my disgust at LNP late last year and here’s the response from my electorate rep (John Alexander) for LNP –

    On 5 Dec. 2016, at 3:46 pm, Severino, Daniel (J. Alexander, MP) wrote:

    Dear Divya,

    Thank you for your recent email regarding Mr Alexander’s comments on Housing Affordability.

    John appreciates your feedback.

    As I’m sure you are aware, John has a great interest in issues of housing affordability and home ownership. These concerns are also highly relevant to his electorate of Bennelong.

    In the previous Parliament, John chaired an inquiry into home ownership. From this, John developed the view that a complete suite of policies are needed to addressed the imbalance between home owner-occupiers and investors.

    Whilst John is no longer part of the committee which oversees this inquiry, it is our understanding that the committee will recommence the inquiry in order for the report to be finalised.

    John is a supporter of genuine reform when it comes to housing affordability, and is keen to see a range of policies being implemented to address the issue.

    On the matter of individuals having the option to use their super to purchase a home, it is by no means the sole solution to the housing affordability issue. Its purpose is to further assist the home owner-occupier to enter the market in conjunction with other policies. The purpose of everything John has raised is to rebalance the housing market away from the investor and towards the home owner-occupier.

    Thank you again for your interest in the matter.

    Kind Regards,

    Daniel Severino

    Electorate Officer

    John Alexander OAM MP | Federal Member for Bennelong

    44-46 Oxford Street, Epping NSW 2121

    Electorate Office | P: (02) 9869 4288 F: (02) 9869 4833

    Connect with John Alexander MP: Website | Facebook |Twitter