The folly of first-home grants 

Chris Vedelago

Apr 21, 2011
theage.domain.com.au 

http://theage.domain.com.au/home-investor-centre/blogs/domain-investor-centre-blog/the-folly-of-firsthome-grants-20110421-1dpvs.html

It’s budget time again and with the property market on the slide, there’s a fresh push underway by the industry for government to boost the flagging fortunes of the sector with new subsidies and to ensure that existing support remains a sacred cow.

Last week, the Real Estate Institute of Australia put out its 2011-12 Commonwealth budget submission which, as can be expected for a lobby group, reads like an industry wish list.

Preserve negative gearing. Abolish stamp duty. Keep capital gains tax rates at current levels. Allow first-home buyers access to their voluntary superannuation contributions.

But it was the group’s suggestions for the First Home Owners Grant (FHOG) that really caught my eye:

"One of the most important housing policy instruments in assisting first-home buyers with housing affordability is the First Home Owners Grant (FHOG), which was introduced in July 2000"

"The REIA proposes that the FHOG be set at $15,000 for all housing, new and established [up from $7000 now], and that it be indexed to median house price movements annually."

In a remarkable, if not unsurprising bit of Orwellian-style double think, there’s not a hint about the role of first-home grant has had in actually making property more unaffordable.

Apparently, the lessons learned during the global financial crisis don’t apply.

In October 2008, with the property market ailing fast and the economy teetering on the edge of recession, the Rudd government doubled the first-home owners grant to $14,000 for established homes and tripled it to $21,000 for new homes.

Within a matter of months, the market was taking off again.

A record number of first-home buyers poured into the market, driving a steep rise in prices.

Between September 2008 and December 2009 - when the boosted grant was scaled back - Australia’s median house value rose 11.4 per cent or by $42,000, according to analysts Residex.

Of course, the grant wasn’t solely responsible.

The Reserve Bank had repeatedly slashed the interest rate, which hit a 49-year low by April 2009. Population growth and an apparent housing shortage had a role to play. Foreigners were also given wider buying rights.

However, first-home buyers were the spearhead of demand, choosing to jump into the market in a time of uncertainty because of the apparently more affordable conditions. It was first-home buyers that primed the engine of the market, which eventually led to a full fledged recovery and boom in late 2009-early 2010.

But it’s a whole other question of whether, as the REIA submission states, that RBA and government’s extraordinary intervention actually "improved housing affordability".

In Melbourne, for example, the value of the boosted grant was effectively wiped out by price rises within a matter of months of its introduction.

At the time, I reported:

"New figures from property analysts Residex show that 57 per cent of suburbs with average house values below $350,000 experienced a price increase of more than $7000 in the six months to March. A similar rise was recorded in almost half the suburbs with house prices below $500,000."

The inflationary process accelerated even faster as the year progressed and the market gathered strength, with a follow up story just a few months later noting:

"Prices have blown out by at least the value of the $17,000 grant [federal and Victorian contributions] in nearly half of lower-priced suburbs, with a growing number of first-time buyers now spending far more than they receive from the grant."

"Price rises have swallowed up the full grant amount in 66 of the 150 suburbs with a median value below $500,000 in the nine months to June. That’s up from just 10 suburbs in March."

There was also a marked tendency during this period for first-home buyers to take out bigger and bigger loans in order to get higher-priced properties and chase the rapidly rising market. Not exactly the best outcome of the grant.

As an economic policy, the boosted first-home owners grant undoubtedly did its job, propping up the market in a time when demand was falling off significantly.

And for individual first-home buyers - those who bought early or bought well - the boosted grant undoubtedly went a long way to improving their bottom line.

That being said, for first-home buyers collectively the grant probably did a lot more harm than good in terms of driving up prices.

There’s a very good reason why some industry critics have called dubbed it the "first-home vendors grant".

Boosting the grant again in a bid to boost the property market - and indexing it to median house prices - would make a lot of financial sense for the industry and vendors, who could expect it to operate as a gift that keeps on giving.

But the plan doesn’t hold up as an argument for boosting affordability.