In the Q&A following yesterday’s speech, Reserve Bank Governor, Phil Lowe, made the subtle but important observation that “you don’t fix [housing] affordability by boosting demand”.
The veiled warning comes after it was all-but confirmed over the weekend that the Turnbull Government would include in the Budget some type of measure to make it easier for first home buyers (FHBs) to save a deposit and enter the housing market. That is, either:
- allowing aspiring FHBs to salary sacrifice some of their pre-tax income into a special home saver account, thereby slashing the time taken to save a deposit and reducing buyers’ overall income tax bills [most likely]; or
- allowing FHBs to use their superannuation savings for a housing deposit [less likely].
We agree with Phil Lowe that either approach would represent very poor policy from the Coalition, since it would increase FHB’s ability to pay, thus adding further demand to the housing market, bidding-up prices, and making housing affordability even worse.
As we keep saying, housing affordability can only be improved via policies that reduce demand and/or increase supply. Reform should focus on areas like:
- Slashing immigration to sensible and sustainable levels [reduces demand];
- Undertaking tax reforms like unwinding negative gearing and the CGT discount [reduces speculative demand];
- Tightening rules and enforcement on foreign ownership [reduces foreign demand];
- Extending anti-money laundering rules to real estate gatekeepers [reduces foreign demand]; and
- Providing the states with incentive payments to:
- undertake land-use and planning reforms [boosts supply];
- swap stamp duties for land taxes [boosts effective supply]; and
- reform rental tenancy laws to give greater security of tenure [reduces demand for home ownership].
Unfortunately, the Turnbull Government has 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.
