Sunday was a bad day for aspiring homebuyers. Both sides of politics proposed policies which will put upward pressure on housing prices – albeit one more than the other.
The Coalition is proposing that, if elected, it will make interest payments on mortgages (up to a maximum value of $650,000) taken out by first home buyers (with incomes of less than $175,000, or $250,000 combined for couples) who purchase newly built houses or apartments tax-deductible for the first five years.
The Coalition is claiming that that this will save a first home buyer in the 30% tax bracket with a $650,000 mortgage about $12,000 a year, or for someone in the 37% tax bracket with a similar mortgage about $14,500 a year.
But we know from past experience – the big falls in interest rates that occurred during the global financial crisis and the Covid-19 lockdowns – that first home buyers won’t actually save these amounts. They will take out bigger mortgages. And so house prices will go up. As they always do.
At least the tax-deductibility of mortgage interest will be limited to those first home buyers who buy new homes. The Coalition argues that its policy will encourage more first time buyers to purchase new homes – if they can find them, because there’s nothing in this policy which will encourage more homes to be built.
But, as a matter of simple logic, if the demand for new homes increases and the supply of new homes doesn’t, then the price of new homes will go up. And history tells us that this will be reflected, to at least some extent, in the prices of existing homes.
When you combine this with the Coalition’s “super for housing” scheme – which in effect is a “souped-up” first homeowner grant scheme using first homeowners’ money (their superannuation savings) rather than taxpayers’ – the effect of the Coalition’s housing policies will be to reignite housing price inflation, the principal cause of the housing crisis we have today (indeed, it has been building for more than two decades).
But the Coalition isn’t alone in advocating policies which would add to upward pressure on housing prices.
At its campaign launch, Labor promised to extend its deposit guarantee scheme, allowing all first home buyers (rather than, as now, those with incomes of less than $125,000 or $200,000 for couples) to buy a first home with a deposit of 5%, by guaranteeing the remaining 15% of a mortgage normally covered by a deposit to avoid having to take out lenders’ mortgage insurance. And the cap of 50,000 on the number of participants eligible to take up the scheme in any one financial year will be abolished.
In theory, this scheme allows someone who’s saved up a deposit of, say, $50,000 – and can thus take out a mortgage of $200,000 (without lenders’ mortgage insurance) and so can buy a $250,000 house (if she or he can find one) – to be able to take out a mortgage of up to $800,000 (and thus buy a much more expensive house).
In practice, of course, someone who’s only been able to accumulate a deposit of $50,000 probably wouldn’t be able to service an $800,000 mortgage – the loan serviceability assessment criteria applied by lenders won’t change. But he or she might be able to service a mortgage of, say, $400,000. And so with borrowing capacity thus enhanced, prices will go up.
Labor says its proposal will allow about 3,000 people unable to buy homes at all to do so, and a further 27,000 people who can afford to buy homes to take out a larger mortgage to buy a more expensive one. It’s arguing that this won’t have a substantial impact on house prices – although it is at least honest enough to acknowledge that it will have some impact.
And it is also proposing a policy which will do something to boost the supply of housing – by “investing” $10bn by way of grants to the states and territories ($2bn) and interest-free loans or equity investments ($8bn) to speed up the construction of homes, especially on vacant or under-used government land, for sale to first home buyers. Labor says that this will result in the construction of an additional 100,000 homes over eight years.
One is left to wonder, why do parties of both major political persuasions keep doing things which they know will put upward pressure on house prices, and thus exacerbate the problem they say they are trying to solve?
It’s hard to avoid the conclusion that the reason is that they know there are only about 110,000 people who each year succeed in becoming first home buyers. And even if you assume that for every one who does, there are five or six who don’t, that’s still only 700,000 or so votes, tops, for policies that might restrain the rate of house price inflation or halt it altogether. Politicians also know that at any point in time there are more than 11 million voters who own their own homes, and more than 2.25 million who own at least one investment property. The last thing those 11 million to 13 million voters want is anything that might restrain – let alone halt – the rate of property price inflation.
So, on the one hand, 700,000 votes, on the other, something north of 11 million – even the dumbest of our politicians can “do that math”. And they do.