The housing policies announced in this election by both the Labor and Coalition Parties are seriously flawed.

However, the Coalition’s policies are even more likely to result in higher prices for dwellings, as well as flouting basic principles of taxation and superannuation.

How housing affordability has declined

In the last few decades, owning a home has become increasingly unaffordable. For example, between 2004 and 2024, the national dwelling price to income ratio climbed from five to eight times and hit ten in Sydney. Back in the 1960s, when my wife and I built our first home, the ratio of house prices to income was about three.

Not surprisingly, home ownership has dropped, particularly for young people. In 1981, 61% of Australians aged 25 to 34 were homeowners, but this fell to about 43% in 2021.

The counterpoint has been that in the 25 years to 2019-20, the proportion of people relying on private rentals increased from 18.4% to more than 26%. However, the proportion living in state or territory social housing almost halved, to 2.9%.

Low vacancy rates also mean that private rents have surged, with the national median rent increasing from $413 per week to $624 per week between March 2020 and June 2024.

Housing affordability is clearly a major aspect of the so-called “cost of living crisis”, and in their campaign launches, the leaders of the two major parties announced new measures to assist first-home buyers.

Major parties’ housing policies

At Labor’s launch, Albanese pledged to extend the First Home Guarantee Scheme which allows first-home buyers to purchase with a 5% deposit; the government would guarantee the remaining 15% of the regular 20% deposit. This guarantee allows first home buyers to avoid Lenders Mortgage insurance which costs $23,000 on average.

From 1 July, there will also be no caps on the number of places (currently 50,000 annually) nor on the incomes of first home buyers (currently $125,000 for singles, and $200,000 for couples). In addition, property price limits will be raised in each city and region – rising from $900,000 to $1.6 million in Sydney, for example.

Labor’s other major plank for housing was that it would invest $10 billion ($2 billion in grants and $8 billion in concessional loans) to partner with state developers and industry to build up to 100,000 social and affordable homes which would be reserved for sale to first home buyers. This is on top of Labor’s existing subsidy program which enables community housing organisations to obtain low-cost debt from Housing Australia.

Finally, in its budget just before the election campaign began, Labor committed $54 million to help states and territories increase and establish certification for prefabricated and modular home construction, which should accelerate building of more homes.

Dutton’s major new policy announcement was that the Coalition would make interest payments tax deductible for the first five years for newly built homes. The Coalition also promised to offer councils $5 billion to connect new homes to roads, sewerage, water and other infrastructure at housing development sites, which it claims will deliver 500,000 new homes.

In addition, the Coalition has previously promised to allow first home buyers to withdraw up to $50,000 from their superannuation, and to make interest payments tax deductible for the first five years. It has also promised to ease the lending restrictions, put in place by the Australian Prudential Regulator Authority when interest rates were very low and expected to rise.

And the Coalition has committed to reducing immigration on the grounds that this would reduce the demand for housing, but by how much and how is uncertain. Fewer migrants may also reduce housing supply if, as is likely, it affects the number of skilled tradesmen available to build new housing stock.

Comparison and assessment of the housing policies

Many of the proposed policies will tend to increase the demand for housing. But whether housing becomes more affordable will depend on whether the supply increases in response to increased demand.

Frankly, the risk is that the supply will not respond adequately, and the extra assistance will be gobbled up in price rises.

Clearly, supply constraints must be the only reason why, over the last 20 years the median house price has increased from five times the median income to eight times that income. If, instead, the supply of dwellings had increased proportionally to the increase in demand, then there is no reason why the price of housing would have increased relative to incomes.

Further, there are only two factors driving up the supply-price of housing – the cost of construction and the price of the land for each dwelling.

While construction costs have also increased, the increase over the last 20 years was 114%, only a bit higher than the 81% increase in wages over the same period from 2004 to 2024.

Certainly, that relatively small difference between the rate of increase in construction costs and incomes cannot explain why house prices increased from five to eight times median incomes over the same period. Instead, it was the price of land which has predominantly driven the relative increase in house prices.

Thus, the obvious explanation for the excessive increase in dwelling prices is the shortage in new sites approved for more dwellings. State Labor Governments in NSW and Victoria are starting to try and increase the supply of dwellings, particularly where people want to live in the middle and inner suburbs of major capital cities.

But even if the planning system is reformed so that we get an adequate supply of dwelling sites approved more quickly, it will still take time to build the additional dwellings needed. So in the meantime, governments should be cautious about increasing demand.

And in this regard, the Coalition’s policies to subsidise the cost of borrowing for a home not only risk escalating the price of housing, but are also bad policies in their own right.

First, making interest payments tax-deductible massively favours the rich and is highly regressive. As Brendan Coates of the Grattan Institute has pointed out, the interest tax subsidy for someone in the highest tax bracket is nearly four times greater than the subsidy for someone in the lowest tax bracket who buys the same typical dwelling with the same size loan. In other words, Dutton’s interest rate tax subsidy will mainly benefit rich home buyers who do not need help and will do next to nothing for low-income first home buyers.

Second, offering a tax subsidy for housing while refusing to tax the income from housing, such as the capital gains, is contrary to basic tax principles. Similarly, encouraging people to withdraw money from their superannuation funds years before they retire is contrary to the purpose of superannuation, as it reduces the capacity to fund retirement, and will therefore require more public assistance then.

In sum, too many of both major parties’ housing policies are not well directed to increasing the supply of housing and thus improve housing affordability, with the Coalition’s policies being worse in this respect. In addition, the Coalition proposes to flout fundamental principles of both taxation and superannuation.