Pearls and Irritations

Australia has a problem of housing affordability, but it is mainly concentrated among the poorest young families. Labor’s housing policies are better directed to improving their equality of access, but neither of the major political parties’ policies are adequate to the task.

Housing affordability has declined dramatically over the last few decades, and housing prices have accelerated further in the last couple of years in response to the very low interest rates during the pandemic.

Consequently, home ownership rates have fallen dramatically, especially among the young and the poor.

According to the Grattan Institute, between 1981 and 2016, home ownership rates among 25-34 year-olds fell from more than 60% to 45%, and among the poorest 40% of that age group, home ownership has more than halved, from 57% to 28%. Thus, most of the fall in home ownership amongst young people is concentrated in the poorest 40%; the other 60% account for much less than half of the fall in Australia’s first home ownership rate.

Similarly, most of the fall in home ownership for people aged 35-44 is accounted for by the poorest 40%, and together the poorest 40% of those aged from 25-44 accounts for more than half of the total decline in Australian home ownership across all ages and incomes.

This fall in home ownership has underpinned a widespread perception that Australia has a housing affordability crisis. It is not surprisingly therefore that both the major political parties have responded with new proposals to assist first home buyers enter the housing market. This article compares their respective merits.

Labor’s Help to Buy scheme

Labor responded first to the housing affordability crisis when it announced some weeks ago its Help to Buy scheme.

Labor’s scheme is intended to cut the initial cost of buying a home by up to 40%, with the Federal Government making an equity injection up to a maximum of 40% of the purchase price of a new home, and 30% of the purchase price for an existing home.

There is a price cap for each location. In Sydney, which has the highest price cap ($950,000), a borrower who qualifies would be able to finance a property worth an extra $380,000, and Labor estimates that the monthly mortgage repayments would be $1,600 cheaper.

This Help to Buy scheme is available to 10,000 Australians each year provided that they:

• Earn $90,000 or less per annum for individuals, or $120,000 for couples
• Live in the purchased home and do not own any other land or property
• Have saved a minimum 2% deposit and can finance the remainder of the purchase price through a standard home loan.

If the homebuyer’s income exceeds the annual income cap for two consecutive years, they will be required to start repaying the Government’s financial contribution as their circumstances permit. Also, if that property is sold, the government would share in any capital gains consistent with its equity stake.

The Coalition’s Super Home Buyer Scheme

At the 11^th hour of this election campaign Scott Morrison responded, and the centrepiece of his campaign launch was his Super Home Buyer Scheme. This scheme would allow first home buyers to tap into their superannuation savings to help meet the deposit for their first home.

Under this scheme first home buyers would be allowed to invest up to 40% of their superannuation (up to a maximum of $50,000) to purchase their first home. The scheme would only be available to first home buyers who have separately saved at least a 5% deposit. But there is no limit on the purchaser’s income or the price of the property, it applies to both new and existing homes, and each person in a couple may access the scheme.

A comparative assessment of the two housing assistance schemes

Both Labor and the Coalition’s schemes for helping first home buyers have been criticised for putting upwards pressure on housing prices.

The assessment of most economists is that the reason why housing prices have increased so much, and housing affordability has consequently fallen so much, is because we face a supply problem. Stimulating demand is therefore only likely to further exacerbate the increase in housing prices.

In my view this criticism while valid, is somewhat overdone. Labor’s limit of only 10,000 homes a year, is only 0.17% of the nearly 600,000 houses traded last year, and 4.3% of the almost 230,000 new dwellings commenced. It is thus unlikely to have a major impact on housing prices.

The Coalition’s Super Home Buyer Scheme would help more people, but the amount of assistance would be less. While the number of first home buyers who would access this Scheme is unknown, there would be many first home buyers who would not have sufficient superannuation to make a difference or would not participate because they preferred to maintain their superannuation balances. Again, it seems unlikely that the Coalition’s Super Home Buyer Scheme would have much impact on housing prices.

But that leads on to the other major criticism of the Coalition’s Super Home Buyer Scheme which is that it reduces superannuation savings which are meant to help people in their retirement. The Coalition has understandably responded that any funds taken from superannuation, along with proportional capital gains, must be repatriated to the superannuation fund when the property is sold, and therefore there isn’t any significant problem.

In sum, I agree that neither Labor or the Coalition’s schemes to assist first home buyers would create a significant problem for home price escalation, nor (in the case of the Coalition) for future superannuation balances.

What does concern me, however, when I compare the two schemes, is their respective effectiveness and their impact on equity.

First homebuyers are typically younger, and ABS data show that the median superannuation balance for those aged between 25 and 34 years is just $25,000. At 40% the Coalition’s Super Home Buyer Scheme would offer only $10,000 at this median level.

According to CoreLogic data, the current median dwelling value in Australia is $748,635, which means that the Coalition’s support Scheme could only help increase the size of a standard deposit by around 1 percentage point.

Thus, the Coalition’s Super Home Buyer Scheme is of little help to most young aspiring home buyers. It will only help those who have higher incomes and bigger superannuation balances.

Typically, these higher income young first home buyers will, however, have grown up in families with high socioeconomic status. They therefore have much better access to the “bank of Mum and Dad”, and one wonders if they really need this extra assistance, or if it will change access to home ownership very much.

As noted at the beginning of this article, it is the poorest 40% of young people who account for almost all the decline in homeownership, but these people will not be helped by the Coalition’s Super Home Buyer Scheme.

This poorest group could be enticed and able to participate in Labor’s Help to Buy scheme, but it will not help most of them. There are only 10,000 of these equity grants each year, and these poor home buyers would have to compete against others with much higher annual incomes of up to $90,000 or couples with $120,000.

In sum, Australia does not just have a housing affordability problem. It has a housing equality problem as well. Unfortunately, neither side of politics is doing enough about that, although Labor is certainly the better of the two.

But really effective action to improve housing affordability and equality must concentrate on the supply side. That will require agreement with the States and local governments to change zoning arrangements, plus action to improve the availability of affordable and social housing. Again, Labor seems to understand the issues better than the Coalition.

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