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Stamp Duty 'Relief' For First-Home Buyers Will Only Push Up Prices Further

Is there a State Government really interested in making housing more affordable?

Aspiring first-home buyers, or Game of Homes fans as I refer to them, had only just recovered from the Federal Government's lack of real measures in the 2017 Federal Budget when a new episode has been released in the form of the new NSW State Government Strategy 'A Fair Go for First Home Buyers'.

As always, while waiting for this policy announcement (probably brought forward as a result of the NSW Labor Opposition announcing their housing policy on May 17), I was hoping for a State Government to deviate from the Game of Homes script and actually do something that might materially impact on the lives of our first-home buyers.

But, no. What we got was the usual political spin, and fake benefits for first-home buyers.

Let's start with the spin.

Page 1 of the new policy says:

Between 2000 and 2010, dwelling completions across NSW declined substantially. In Sydney, the decline was even more severe with less than half the number of homes completed in 2010 as there were in 2000.

Obviously, the policy was referring to the dark years before the current government was elected. Now, while these facts are true, they are telling a fake story. Completions in 2000 were abnormally high because everyone was trying to get their new home built before they had to pay GST on them, which would have been obvious had showed the earlier period.

Also remember that the year 2010 was just after the GFC, when house prices had decreased in Sydney. So probably there was a pretty good reason why the dwelling numbers were down in 2010, and hence much less than in the year 2000.

Anyway, the political story in this Game of Homes is a simple one. The Labor Party are the bad guys because, as the population grew, the previous government failed to maintain sufficient supply of housing across Sydney. This is part of a theme we have previously explored. It's Economics 101 -- price is simply a supply problem because of a housing shortage.

Looking past this claptrap was the RBA's Head of Economic Analysis Jonathan Kearns, who rejected this argument in a speech in 2012:

If we think that there has indeed been a relative shortage of supply over the past decade or so, one puzzle is why house prices have been flat or even declined a little (relative to incomes) over this period. One possibility is that, after the large increase in prices in the late 1990s and early 2000s, there has been a gradual reassessment by households of the fundamental value of housing, and their willingness to take on debt to fund housing.

Kearns also commented in the same speech:

Historically, new construction has typically increased with faster growth in house prices, and so an extended period of weak house price growth could be a factor in the limited increase in the supply of new housing.

We can get another angle on the weakness of this supply shortage argument by looking at data from a recent research study from the Australian Housing and Urban Research Institute (AHURI).

The study showed that, between 2006 and 2014, Melbourne had been able to produce a greater percentage increase in new dwellings than population (21 percent increase in dwellings compared to 19 percent in population), while Sydney's dwelling growth rate couldn't keep up with population growth rate in the same period (12 percent dwelling increase to 14 percent population increase).

Based on the simple supply/demand argument we would expect Sydney prices to have increased more than Melbourne, but actually the opposite was true. Melbourne prices went up by 34 percent while Sydney prices went up by 17 percent.

OMG! Perhaps housing markets are more complicated than the Game of Homes "not enough supply" narrative would suggest!

So, going back to the new State Government policy: what are the two main strategies?

The first is to remove or reduce stamp duty for first-home buyers if they buy dwellings for less than $800k. This is a real favourite for governments. First-home buyers think the government have given them a large gift and think warm thoughts about them. But let's look at what has really happened. When the first-home buyer goes to an auction on Saturday, July 1 (the day the measure is introduced) they don't have to pay stamp duty. So, depending on what sort of property they are interested in, they will make some big savings. For a home worth $650k they will save stamp duty of almost $27,000.

Now, if the price of housing was fixed, the story would stop there. The first-home buyer would pocket the savings and everyone would live happily ever after. But the price of housing is not fixed -- it is determined through the auction process. So what is the first-home buyer going to do when the bidding starts to get a bit heated against other first-home buyers, or investors with all those tax benefits in their pocket?

What happens is pretty clear.

The bidding goes on for longer and the person selling the house makes a nice bonus thanks to the State Government (aka us the tax payer). They should call this sort of scheme 'The First-Home Vendors Scheme', as they were the ones cheering last week when the package was announced.

The next part of the policy is a lot of stuff about increasing supply. None of this terrible -- more supply is good, but part of the game is to make you think it will make a big difference to price.

An economic advisor to the State Government -- Dr Peter Abelson -- recently released some estimates about the impact of new supply on house prices. He suggested that a 50 percent increase in housing supply in Sydney would result in a 2 percent decrease in house prices (in real terms).

Given the size of price growth in Sydney over recent years, that decrease in price won't be much comfort to would-be purchasers. But the really bizarre story is that the Government is acting like there is some sort of supply emergency -- perhaps they haven't noticed all the cranes popping out of the Sydney skyline (292 residential cranes at last count). And if there is still a severe shortage of homes in Sydney, why have rents turned down and house prices for the moment seem to have stabilised?

Just as Jonathan Kearns discussed, there will be a supply problem in Sydney when we hit the top of the market and investors start rushing for the doors. What the Government could have announced is a scheme for community housing providers to construct some affordable rental housing and, at the same time, provide some affordable 'starter" homes for first-home buyers that could be based on first-home owners getting a good deal that could be sustained across ownership changes.

Perhaps they could have combined this with some sort of shared equity scheme. The money the State Government is gifting to home sellers could have been provided as start-up funding to these organisations so we could get some genuine affordable home packages. Instead we have got the same old stale arguments and the use of an "add more fuel to demand" strategy to help push up prices further.

Is there a State Government really interested in making housing more affordable? Let's hope that the next part of the NSW housing strategy (due NSW Budget night) can depart from their current Game of Homes script.

But I'm not holding my breath.


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