The $5b move that could smash house prices

Both parties are offering a mix of housing policies.  Some are solidly based on the available research; some are terrible.

The Coalition’s proposal to spend $5 billion on housing friendly infrastructure is perhaps the policy that might do most to improve affordability. It aims to unlock infrastructure bottlenecks — often local roads and sewers — holding up housing development.

Spending like this has traditionally been a state government responsibility, but federal assistance should make a big difference.  In particular, it would help to expand state government policies for transport-oriented development, the leading vehicle for boosting housing supply.

The Coalition claims its infrastructure spend would unlock about 500,000 extra homes, an assessment supported by industry bodies. Under conventional rules of thumb, this additional supply would reduce housing prices and rents by about 12 per cent.

The government has a somewhat similar proposal to spend $10 billion helping to build 100,000 homes for first home buyers. Some of this would go to infrastructure, like the Coalition’s policy. But most would go to land purchase and construction. This would also boost supply, improving affordability.

The Coalition’s supply policy has a much greater ‘bang for the buck’, promising twice as many homes for a fraction of the cost. This is because the Coalition relies on the private sector to do the work —which it is eager to do. Large government subsidies are not needed to increase construction. All the government needs to do is remove obstacles.

The Coalition is also promising to allow superannuation to be used for home purchase. This enables home buyers to get over the deposit hurdle using their own savings. In a recent CIS research paper, Matthew Taylor and I estimate super for housing could help an extra 390,000 households into homes of their own.

Super for housing is controversial. One objection is that withdrawals would weaken compulsory superannuation, a system supported by all major parties. However, that can be overcome by using superannuation as collateral. Effectively, the buyer’s super account would act as guarantor.

The government has a similar proposal. It is offering to act as guarantor for first home buyer loans, requiring a deposit of only 5%. This would save on Lenders Mortgage Insurance, which can cost up to $20,000 on a typical loan.

Super for housing and the government guarantee are both directed at overcoming the deposit hurdle. The difference is that the government’s policy puts taxpayers on the hook, whereas under the Coalition’s proposal, it is the buyer’s retirement account that bears the risk.

A government guarantee encourages buyers to gamble with other people’s money, turning home purchase into a one-way bet. It is an invitation to imprudent borrowing. Policies like this have a track record of ending badly.

Both super for housing and the government guarantee boost demand, putting upward pressure on housing costs. So the supply-side measures discussed above are a higher priority.

Nevertheless, housing deposits are an important obstacle to homeownership, so should be addressed, especially if that can be done without taxpayer funds.

The same cannot be said for the Coalition’s policy to make mortgage payments tax deductible. This is arguably the worst of the recent housing policy proposals.

Tax deductibility is likely to be worth about $60,000 for many borrowers, costing the government $1.2 billion.

Like other boosts to demand, the beneficiaries will bid up prices, making housing more expensive for everyone else. Tax deductions narrow the tax base, requiring higher rates, worsening incentives and evasion. And it is inequitable, being of most benefit to those in high marginal tax rates.

Mortgage deductibility resembles First Home Owner Grants — a policy many economists argue is counterproductive — except deductibility is more expensive, misdirected and in a form that is less useful to the recipients.

Immigration policy is not usually considered as ‘housing policy’ but it actually has larger effects on affordability than most of the measures discussed above. The Coalition is proposing to reduce Net Overseas Migration by 100,000 a year, relative to the Budget projections. Econometric modelling I did while at the RBA would suggest that such a change would reduce housing prices and rents by 11 per cent over a decade.

However, a reduction in immigration has large economic and social costs. It would worsen the fiscal deficit, reduce export earnings, reduce productivity and slow technological progress. it would reduce living standards overall, despite the improvement in housing affordability.

Overall, the housing policy promises from the major parties are mixed. They both offer assistance for housing supply, which is what the available research says we need. However, they also boost demand in ways that are not well targeted — especially the Coalition’s proposal for tax deductions.

 

Dr Peter Tulip is Chief Economist at the Centre for Independent Studies and the author of many research papers on Australian housing policy.