Today’s blog was published as a feature “A lose-lose election for home buyers” by The Age Business. Click here to download this post as a PDF file (with charts).
Both Liberal and Labor housing policies will make Australia’s debt and housing affordability crises worse. The only difference between the two is how much damage they will do.Both parties have promised tax-advantaged savings systems that will enable First Home Buyers to accumulate larger deposits. This will undoubtedly help them compete with other buyers in the housing market, but a lack of competition amongst buyers isn’t the problem.
The real problem is that we’ve driven house prices far too high, by devoting far too much borrowed money to buying houses. By increasing deposits while doing nothing about loans, both parties will only add fuel to the house price fire.
The ALP gives the example of a two income family, earning average wages, who could increase their deposit by $18,000 as a result of their scheme (and the Liberals scheme is much the same). That looks good on paper.
But without any change to lending policies, that larger deposit will simply be used to secure a larger loan–up to $360,000 larger, if Mr & Ms First Home Buyer attempted to buy a house with a 5% deposit. Of course, no lender would offer such a loan–because even with an 8% home loan rate, interest payments would consume 140 percent of their gross income. But in the current housing market, they could easily be offered an interest-only loan equivalent to 85 percent of the purchase price, with repayments of 47 percent of their income.
And what would that do to home affordability? Make it worse, of course. A fair slab of their increased purchasing power would be eaten up by yet higher prices, driven by ever higher household debt. The Liberals scheme is even worse, because it adds three more logs to the house price fire:
- It allows relatives to contribute up to $1,000 a year to the savings account;
- It lets relatives take an equity stake in the First Home Buyers house, without being liable for capital gains tax on its sale; and
- It promises to use future government surpluses to top us these savings accounts.
We have already achieved the world’s most unaffordable housing with loans that are based solely on the incomes of the borrowers. This proposal would throw parents income and government savings into the mix, and therefore push mortgage debt beyond its already astronomical level. It’s a silly step towards the madness that marked the peak of Japan’s ill-fated Bubble Economy in 1990, when lenders briefly offered 99-year mortgages.
We thus face a choice between a bad housing policy, and an almost insane one. I hope that neither represents what either party really thinks is needed, but is instead a product of this “me too” election campaign, where each side is afraid of suggesting a policy that can be “wedged” by its opponent.
With both parties offering us a Hobson’s Choice on housing in this election, the best we can hope for is that whoever wins ditches their campaign promise, and instead develops a policy that restores some parity between mortgage debt and income–perhaps by limiting loans to some sensible multiple of the rental income that a house can be expected to generate.
