Tax breaks 'key to easing housing crisis'
September 21, 2007
ANZ chief economist Saul Eslake says that calls for an increase in the first home buyer's grant are ill-founded and will simply compound the housing affordability crisis.
Instead, Mr Eslake believes tax breaks could be the key to easing the nation's housing affordability crisis.
With a federal election looming, coalition backbenchers this week called for action on housing affordability, some suggesting the first home buyer's grant should be increased.
But Mr Eslake says the first home buyer's grant has actually made housing affordability worse and any increase in its value would simply compound the problem.
Housing affordability is already at record low levels, and getting worse, as supply levels continue to dry up in spite of increasing demand.
It's that gulf between supply and demand that has driven house prices to excessive levels. This has been spurred on by competition between first home buyers and investors encouraged into the market by a cut to capital gains tax in 1999 and more recently by the first home buyer grants.
Mr Eslake said housing affordability was as dire today as it was when interest rates were at 17 per cent 18 years ago - but for very different reasons.
"Whereas, the reason for dire housing affordability back then was high interest rates and the solution to it was low interest rates, which in principle is easy enough to achieve, today housing affordability is as bad as it is because of high house prices.
"And really, the only solution to that is lower house prices, which of course the majority of those who already own houses are not too keen on because it's their main source of wealth."
Mr Eslake said the reason house prices were as high as they were was because demand for housing had exceeded supply for the best part of 15 years.
The introduction of the first home buyers grant simply added fuel to the fire, and increasing the $7000 grant would do much the same, Mr Eslake said.
"You don't solve the problem by further boosting demand, which is what giving cash to buyers, whether it's through stamp duty concessions or increases to first homeowner grants, actually does.
"They might as well give the cash straight to the people selling the houses because that's where it's going to end up - it's not going to make housing any more affordable at all.
"Indeed, it will probably make it even less affordable."
This week Treasurer Peter Costello has scotched suggestions from coalition MPs that the housing affordability problem can be alleviated through an increase to the first home buyers grant.
"If you were to increase (the grant), you've got to bear in mind that it would probably increase prices as well," Mr Costello said.
"You've got to be very careful of this."
However, the first home buyer's grant was not the only policy that had damaged the prospects of Australians chasing the dream of owning their own home, Mr Eslake said.
For those looking to buy a home, as opposed to people investing in property, cutting the capital gains tax was an appalling decision, he said.
Mr Eslake said it was a move he said that added to market speculation and drove up property prices.
"It brought subsidised investors into competition with home buyers."
Mr Eslake said he doubted that land releases - another remedy suggested by coalition backbenchers this week - would have much of an effect on housing affordability.
He said that at the margin, the release of more land would help.
"But the majority of homebuyers don't want to live in the places where land could conceivably be released."
"It could help again at the margin if local governments and state governments allowed more urban consolidation - that is for existing land to be occupied by more multi-dwelling units.
"But it appears not to be very popular with the people living next door to where dwelling unit density is being increased."
Mr Eslake suggested that to improve housing affordability home buyers should be allowed to claim interest payments on their home loan as a tax deduction.
"But with the quid-pro-quo that they also pay capital gains tax on any increase in the value of their house when they sell it."
"It would be in effect a shared equity scheme financed by the tax office."
September 21, 2007
ANZ chief economist Saul Eslake says that calls for an increase in the first home buyer's grant are ill-founded and will simply compound the housing affordability crisis.
Instead, Mr Eslake believes tax breaks could be the key to easing the nation's housing affordability crisis.
With a federal election looming, coalition backbenchers this week called for action on housing affordability, some suggesting the first home buyer's grant should be increased.
But Mr Eslake says the first home buyer's grant has actually made housing affordability worse and any increase in its value would simply compound the problem.
Housing affordability is already at record low levels, and getting worse, as supply levels continue to dry up in spite of increasing demand.
It's that gulf between supply and demand that has driven house prices to excessive levels. This has been spurred on by competition between first home buyers and investors encouraged into the market by a cut to capital gains tax in 1999 and more recently by the first home buyer grants.
Mr Eslake said housing affordability was as dire today as it was when interest rates were at 17 per cent 18 years ago - but for very different reasons.
"Whereas, the reason for dire housing affordability back then was high interest rates and the solution to it was low interest rates, which in principle is easy enough to achieve, today housing affordability is as bad as it is because of high house prices.
"And really, the only solution to that is lower house prices, which of course the majority of those who already own houses are not too keen on because it's their main source of wealth."
Mr Eslake said the reason house prices were as high as they were was because demand for housing had exceeded supply for the best part of 15 years.
The introduction of the first home buyers grant simply added fuel to the fire, and increasing the $7000 grant would do much the same, Mr Eslake said.
"You don't solve the problem by further boosting demand, which is what giving cash to buyers, whether it's through stamp duty concessions or increases to first homeowner grants, actually does.
"They might as well give the cash straight to the people selling the houses because that's where it's going to end up - it's not going to make housing any more affordable at all.
"Indeed, it will probably make it even less affordable."
This week Treasurer Peter Costello has scotched suggestions from coalition MPs that the housing affordability problem can be alleviated through an increase to the first home buyers grant.
"If you were to increase (the grant), you've got to bear in mind that it would probably increase prices as well," Mr Costello said.
"You've got to be very careful of this."
However, the first home buyer's grant was not the only policy that had damaged the prospects of Australians chasing the dream of owning their own home, Mr Eslake said.
For those looking to buy a home, as opposed to people investing in property, cutting the capital gains tax was an appalling decision, he said.
Mr Eslake said it was a move he said that added to market speculation and drove up property prices.
"It brought subsidised investors into competition with home buyers."
Mr Eslake said he doubted that land releases - another remedy suggested by coalition backbenchers this week - would have much of an effect on housing affordability.
He said that at the margin, the release of more land would help.
"But the majority of homebuyers don't want to live in the places where land could conceivably be released."
"It could help again at the margin if local governments and state governments allowed more urban consolidation - that is for existing land to be occupied by more multi-dwelling units.
"But it appears not to be very popular with the people living next door to where dwelling unit density is being increased."
Mr Eslake suggested that to improve housing affordability home buyers should be allowed to claim interest payments on their home loan as a tax deduction.
"But with the quid-pro-quo that they also pay capital gains tax on any increase in the value of their house when they sell it."
"It would be in effect a shared equity scheme financed by the tax office."