The fundamental problem with government’s housing reforms

The government has dialled up the rhetoric about its housing reforms being blocked by the Senate, but the primary effect is political.

The proposals include a ‘Help to Buy’ program that provides government finance in return for an equity stake in a home, and  a ’Build to Rent’ program that provides tax concessions for housing that is rented out by the builder.

However, the reality is that the proposals will build very few homes, with minimal effect on housing affordability.

Rather, their objective appears to be a display of empathy – to convince struggling voters that the government cares.

The Help to Buy program is only available to 40,000 home buyers. As Greens MP Max Chandler-Mather says, it will improve housing access to “0.2% of eligible households … while for the other 99.8% Labor’s scheme will make things worse by driving up house prices.”

There is no guarantee that even those 40,000 places will be taken up. Shared equity schemes like Help to Buy have been tried in several states but have not been popular. NSW recently abandoned its failed program when only 12% of 6,000 available places were accessed.

Worse still, Help to Buy subsidises risky borrowers; putting taxpayer funds on the line in the case of defaults.

Ironically, the situation is more complex — and farcical — than it appears, because subsidies are actually not necessary to let these buyers into the market. Banks would probably lend to those borrowers except for overly-restrictive APRA lending regulations.

What is the rationale for the federal government to prevent banks lending to these borrowers only to turn around and provide taxpayer assistance to incentivise them to do so?

Moreover, Help to Buy increases the demand for housing; worsening affordability overall.

Meanwhile the Property Council, a leading advocate for Build to Rent proposals, describes the legislation as “completely ineffective”.

The government’s policies accompany the Housing Australia Future Fund (HAFF), the first grants from which were also announced this week. The HAFF is also intended to provide only 40,000 homes in the next few years.

The fundamental problem with most of the policies currently being proposed — whether from Labor, the Coalition or the Greens — is that they do not substantially increase housing supply.

In total, the government’s housing policies are little more than rounding error on National Cabinet’s target of 1.2 million homes.

That target, and the state government reforms being implemented in pursuit of it, are the main game in housing policy.

1.2 million extra homes represents about a tenth of the national housing stock. That will make a real difference to housing affordability, especially if the policies that deliver those homes are maintained. The proposals before the Senate will not.

To be fair, the government is not alone when it comes to symbolic posturing on housing. The Greens are worse offenders, including with their insistence on rent controls. However, that is a state responsibility which the federal government does not control.

More importantly, rent controls are terrible policy, having repeatedly backfired when they have been tried. Economists — notorious for disagreeing among themselves — are in almost universal agreement that rent controls reduce the amount and quality of affordable rental housing.

The Greens also demand the repeal of negative gearing and the capital gains tax discount. However several research studies, using a variety of approaches, estimate this would only reduce housing prices by 1 to 4%, while increasing rents.

The Coalition is also posturing. Its main policy is to allow home buyers to access their superannuation.

This is an attractive policy in principle. However, in practice, it would boost the demand for housing and hence raise prices.

The Coalition has said super for housing would be accompanied by measures to increase supply. However, no supply-side policies have been announced. Further, Liberal politicians in NSW and Victoria are leading the opposition to state government attempts to boost supply.

The politicians know we need more supply, specifically by relaxing zoning restrictions. Their desks are stacked with reports telling them this.

To be fair, many politicians, including the newly appointed housing spokespeople, Clare O’Neil for the government and Andrew Bragg for the Coalition, have argued forcefully for more supply and looser planning restrictions.

However, the impressive rhetoric has not been backed up with meaningful policies.

The federal government has promised a New Homes Bonus of $3 billion for states that achieve their share of the national target of 1.2 million homes. In principle, these payments should increase incentives and help to dispel objections about over-crowding.

However, this doesn’t seem to be having much effect. In local debates over housing approvals, the money from Canberra is never mentioned — suggesting it has not changed incentives.

A problem is that the New Homes Bonus will not be paid for five years (outside the forward estimates). So state and local politicians making difficult decisions now will not be around to enjoy the rewards.

Canberra could rectify this by paying most of the bonus when new housing is approved, with the balance payable after completions.

Although zoning is the main restriction on supply, it is not the only one.

As the latest report from the NSW Productivity Commission argues, the federal government should allow more immigration of skilled construction workers.

Construction trades such as painters, roof tilers, and bricklayers should be on the Core Skills Occupation List. Their omission (whereas yoga instructors and dog handlers are on the list) seems to reflect undue union pressure.

Housing affordability is one of Australia’s greatest social problems. It is good that federal politicians are talking about it.

They should also do something meaningful about it.

 

Simon Cowan is Research Director and Peter Tulip is Chief Economist at the Centre for Independent Studies