At their first televised debate four weeks ago, Scott Morrison and Anthony Albanese were asked by an audience member how each would help his kids afford to buy their own home. Neither had much to offer.
Now, in the final week of the campaign, housing affordability is a red-hot point of difference between the parties.
Each plan reflects the core values of the party pushing them, but both sidestep the major reforms needed to improve housing affordability for all.
On the plus side, at least both are somewhat limited, which means neither should push up house prices dramatically if implemented, contrary to some hyperbolic warnings.
Coalition’s ‘super home buyer’ scheme
The Coalition’s plan, announced on Sunday, is to allow first-home buyers to withdraw up to 40% of their superannuation balance, up to a maximum of A$50,000, for a mortgage deposit. They must return the amount withdrawn, plus or minus any capital gain or loss, when they sell the property.
This amounts to borrowing from your super account. You lose the return your super savings would have accrued, but you gain the return on your house, in the form of avoided rent and any capital gain.
The concept is similar in principle to a recommendation of the recent parliamentary inquiry into housing affordability, chaired by Liberal MP Jason Falinski, calling for super balances to be used as collateral for home loans.
But allowing buyers to actually withdraw money from their super may require super funds to change their investment strategies – investing more in higher-liquidity, lower-return assets – which might be problematic for some super funds with a lot of younger members.
Around a quarter of all homes sold are to first-home buyers, amounting to around 150,000 houses in the past year. While all first-home buyers would be eligible, not everyone would access the scheme, nor use it in the same way.
Some won’t have enough super for it to make much difference. Some will choose not to use the scheme because they don’t want to draw down their super.
Some will offset part of their own private saving or take out a smaller loan. Some will get into the market a little earlier than they otherwise would have. And some will get into the market when they otherwise would not have.
While some have claimed the Coalition’s policy would undermine people’s security in retirement, in fact the opposite is the case.
Home ownership and superannuation are the two pillars of independent financial security in retirement. Owning a home will be preferable to super for many because it is exempt from the pension assets test.
And given housing is by far the biggest form of consumption, owning a home is a far less risky form of retirement savings, albeit potentially at a lower return.
What really matters is the total quantum of retirement assets, and that those assets are allocated in the way that best secures their retirement. So a scheme that enables portability between different forms of retirement saving makes sense.
Labor’s ‘help to buy’ scheme
Labor’s plan is to become an equity partner in 10,000 homes a year. It will chip in up to 40% of the cost of a new home, and 30% for an existing home.
To qualify, individuals must earn less than $90,000 a year, and couples a combined $120,000 a year. There will be a cap on the property value, according to location. In Sydney this will be up to $950,000.
Labor’s scheme is far more generous than the Coalition’s, but it also covers far fewer people.
The 10,000 lucky buyers a year who qualify will be able to finance a property worth an extra $380,000. In contrast, the Coalition’s scheme gives buyers up to $250,000 more in purchasing power (but a lot less for the vast majority with lower super balances).
Labor’s policy also entails a very large subsidy.
If you or I invested 40% in an investment property, we’d also receive 40% of the rental income. Under Labor’s plan, the government won’t. Taxpayers will therefore gift up to 40% of the rent the occupier would otherwise have paid – worth up to around $15,000 a year – forever.
A small portion will be offset by the owner-occupier picking up the govermnment’s share of rates, insurance, and maintenance. But the rest is gravy. That’s why it costs more than $80 million a year.
In previous shared-equity schemes (proposed as far back as 2003) the lender was to chip in a proportion of the equity, but took a higher proportion of the gain to compensate for this loss.
The income limit of $90,000 is also well above the median income of $61,000, making the subsidy a generous form of middle-class welfare. Like a lottery for a lucky few.
Labor argues the scheme will make money for taxpayers through capital gains when properties are eventually sold. But consider that instead the government could invest $10 billion a year in listed property trusts, which would provide a lower-risk portfolio of housing assets at a far higher return. So, relatively speaking, Labor’s policy would run at a loss.
How much will they push up house prices?
Both policies attempt to improve housing affordability by addressing the demand side of the market. That means they both suffer from the problem of all such schemes: by increasing buyers’ purchasing power, they push up prices.
But commentary suggesting either will create a house price explosion is overstated in my view.
First-home buyers are about a quarter of the market. And about half of all 40-year-olds have less than $80,000 in their super, which means the maximum they could withdraw under the Coalition’s scheme is $30,000. And it’s not a first home owner’s grant - participants have skin in the game.
Labor’s plan is of course capped at 10,000 places.
I expect both parties’ schemes to put some modest upward pressure on house prices in the short term – as all schemes focused on demand do – blunting some of the help they offer. The Coalition’s scheme a bit more so given it will extend to more buyers, albeit at a lower amount.
Supply is the real problem
It’s hard for me to get too enthused about any scheme that increases demand but does nothing about the supply side, which is the ultimate source of high house prices.
Australia’s population has doubled since 1970, and yet we all live, more or less, in the same places, fighting over the same bits of land. With greater density, the cost of that land rises. We can only contain housing costs by using that land more efficiently, or having people move to where land is more plentiful.
Increasing housing supply isn’t simply a case of building more houses. It’s also about having the right kind of homes in the right locations. On that, devolving decision making down to the street level, as proposed in the United Kingdom, is a promising idea.
And Labor’s plan to set up a National Housing Supply and Affordability Council is a welcome development that will hopefully help achieve some progress.
Tax and transfer policy also plays a role. State government stamp duty discourages turnover, which prevents better housing matches, driving up prices. Exempting the family home from federal taxation and the assets test for the pension does the same, discouraging downsizing.
The Coalition’s proposal, backed by Labor, to allow people to sell their house, downsize, and put the proceeds in super will help. But we need more.
Negative gearing is a perennial villain but is over-hyped. It’s not clear it has a meaningful effect on house prices, and removing it actually introduces a distortion into the tax system. The real culprit is the overly generous 50% discount on capital gains tax, which is why people use negative gearing in the first place.
After the reception received by an ambitious (albeit somewhat misguided) tax policy agenda at the 2019 election, it may be a while before we make any meaningful progress on that front. For now, the choice between the major parties is between these relatively limited demand-side schemes. Take your pick.