Examining the foundations of Labor, Coalition housing policy

Peter Dutton failed to anticipate the obvious question on Monday, when he trotted his son out to speak to the media about the high cost of housing.

Harry, 20, a second-year apprentice, told the reporters gathered at a real estate development in Brisbane that despite “saving like mad”, he saw no prospect of getting into the housing market “in the near future”.

It’s a common story, to which millions of other would-be home owners might relate, except in one regard. Harry Dutton’s father is a very rich man, in large part as a result of buying and selling real estate.

So the inevitable question was asked: would Peter Dutton help Harry out with some money towards a deposit? The opposition leader was asked multiple times and repeatedly avoided answering.

Dutton had trapped himself. If he said he would not help Harry out, he would look mean and/or untruthful. If he said he would help Harry out, it could be seen as an admission that despite his promises to fix the housing affordability crisis, his son – and by extension others struggling to get into the housing market – could not achieve home ownership without parental help.

In his budget reply speech last month, Dutton promised: “I don’t want young Australians locked out of the property market – or having to rely on the bank of mum and dad.”

Belatedly, on Tuesday, he conceded that the Dutton bank of mum and dad would at some stage give Harry and his siblings help to buy a home. Which is lucky for them, because under the housing policies their father advocates, the cost of buying a home is only going to increase. On that, the expert opinion is overwhelming.

One of the many housing experts critical of the Coalition’s policy is veteran independent economist Saul Eslake, who nominates it as a contender for the title of “worst public policy of the 21st century”.

What makes it particularly bad, he says, is the way two aspects of the opposition’s policy interact.

The first is the Super Home Buyer Scheme, which would allow first-home buyers to access 40 per cent of their superannuation balance, up to a maximum of $50,000, to put towards a deposit.

Leave aside the negative impact that allowing young people to raid their super would have on their retirement savings, the measure would inevitably pump up home prices, says Eslake.

“Sixty years of history shows, without any shadow of a doubt, that anything that allows people to spend more on housing than they otherwise would – whether it’s first-home owner grants, stamp duty concessions, mortgage guarantee schemes, shared equity schemes, lower interest rates, easier credit conditions or tax breaks for property investors – results in more expensive housing.”

That said, not many first-home buyers would be able to take full advantage of the Coalition’s scheme, for they would not have enough superannuation.

According to tax office data, in 2022 the median superannuation balance for women aged 30-34 was just $34,327, and for men of the same age, $39,796. If they withdrew the maximum 40 per cent of their super nest egg, that would amount to just $13,730.80 for women and $15,918.40 for men, to put towards a home.

The three million-odd people in rental accommodation on average have even less super to draw on. A quarter of them have balances of less than $6000, meaning they could access less than $2400 – which does not go far in today’s housing market.

Even if the policy did put substantially more money in the pockets of those turning up to auctions, it would do nothing to increase the number of homes for which they would be bidding. Thus, housing prices would go up – the basic rule of supply and demand.

Not only would the policy inflate prices, it would do so in grossly inequitable style, giving the greatest amount to the people in least need of help.

One virtue of the super-for-housing scheme, notes Peter Tulip, chief economist at the Centre for Independent Studies, is that it would facilitate home ownership at little cost to the taxpayer, because it would allow people access to their own super money.

This contrasts with the second aspect of Dutton’s plan, unveiled last weekend, which the opposition has estimated would cost taxpayers $1.25 billion over the first four years of its operation.

This is the First Home Buyer Mortgage Deductibility Scheme, which would allow first-time buyers who purchase a newly built home to claim a tax deduction for the interest on a mortgage of up to $650,000.

The scheme places no cap on the overall mortgage size or home price and would be open to individuals earning up to $175,000 or couples earning up to $250,000. The deduction could be claimed for the first five years of the loan, even if the owners’ income rose during that period.

“As an illustration,” said the Coalition media release about the scheme, “a first home buyer with a taxable income of $120,000 with a $650,000 mortgage at 6.1 per cent will receive a benefit of around $12,000 a year.” For five years.

Eslake summarises it this way: “Super for housing allows people to put down bigger deposits, which in turn allows them to borrow more. And the interest deductibility of mortgages allows people to borrow a lot more, because it’s equivalent to a reduction in interest rates of roughly one third.”

Once again, the scheme gives the greatest benefit to those who need it least. The $120,000 figure cited in their example is about twice median earnings.

Writing in The Australian Financial Review this week, Tulip judged the mortgage deductibility scheme to be “arguably the worst of the recent housing policy proposals”.

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

It’s hard to recall another policy that has been so comprehensively panned as the First Home Buyer Mortgage Deductibility Scheme. Another comment piece in the AFR, from Steven Hamilton, assistant professor of economics at George Washington University and visiting fellow at the Tax and Transfer Policy Institute at the Australian National University, called it “frankly a terrible tax policy”.

“It’s so bad that even Donald Trump effectively phased it out for the US in his landmark Tax Cuts and Jobs Act of 2017,” wrote Hamilton.

It would do nothing to improve the supply of housing, he said, while boosting prices, blowing a “huge hole in the personal income tax base that will never be recovered”, and was “highly regressive, subsidising 47 per cent of high-earners’ interest but only 30 per cent for those on median earnings.”

Apart from anything else, it seems like a Rube Goldberg way of delivering assistance to first-home buyers.

“It’s such a complex, administratively burdensome way to go about it,” says independent economist Nicki Hutley. “I mean, if you want to give people first-home buyer grants, then just give them first-home owner grants.”

The great mystery, says Brendan Coates, housing and economic security program director at Grattan Institute – who raises all the same criticisms as the other experts, particularly in relation to the scheme’s inequity – is what inspired the shadow housing minister, Michael Sukkar, to put the policy forward.

“This is an announcement that no serious housing expert [has] been calling for,” he says. “The deductibility policy is sort of nuts.”

Nor are most experts supportive of Labor’s big-ticket election promise on housing.

At his campaign launch last weekend, Anthony Albanese promised that if re-elected, his government would allow all first-home buyers, regardless of their income, to buy with just a 5 per cent deposit. This would apply for homes valued up to the average price in the various cities and regions across the country.

The Labor scheme would work by guaranteeing 15 per cent of the loan value, eliminating the need for lender’s mortgage insurance, which currently costs the average buyer about $23,000.

As Saul Eslake explains: “It’s not like the government is actually putting down that 15 per cent. They’re not giving you that money. They’re not lending you that money. They’re just saying to the bank, ‘We will give you the assurance that you normally get from requiring a 20 per cent deposit.’ ”

The government claims that because the scheme operates as a guarantee rather than a handout, it will not inflate housing prices. Peter Tulip believes that, like other demand-side measures, it will.

Furthermore, he argues “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, he says, “encourages buyers to gamble with other people’s money ... It is an invitation to imprudent borrowing.”

Be that as it may, the loan guarantee scheme is unlikely to cost the taxpayer much money because, as Eslake points out, “Australians typically don’t default on their mortgages”.

“A former Reserve Bank governor – who I won’t name – used to say to private lunches of foreign investors that Australians would eat dog food before they defaulted,” he says.

Comparing the respective policies of the major parties, Eslake observes: “While I don’t like either of them, Labor’s policy is less worse.”

The major parties do have other policies, however, that go to the supply side of the housing equation.

Labor’s latest promise is to invest $10 billion, in the form of grants and zero interest loans, in partnership with state developers and industry – which it claims will see “up to” 100,000 new homes built, and reserved solely for first-home buyers.

In its first term, the Albanese government legislated three major pieces of housing policy. Under the Help to Buy scheme, the government can take an equity stake of 40 per cent in first-home purchases, and the Build to Rent scheme offers tax incentives to developers to provide affordable units. The $10 billion Housing Australia Future Fund (HAFF) aims to build 30,000 social and affordable homes.

On the Coalition side, the big new promise is $5 billion to help local government with the supply of infrastructure such as water and sewerage to new housing developments, which it claims would “accelerate” the development of 500,000 homes.

Experts differ on whether Labor’s $10 billion scheme or the Coalition’s $5 billion plan gives bigger bang for the buck, but the consensus is that both at least go to the root cause of the housing crisis, which is a lack of supply – although Saul Eslake, among others, is critical of the opposition’s promise to scrap the HAFF.

It’s also worth noting that neither of the major parties is talking about reforming aspects of the tax system that have long been identified as contributing to the housing crisis, such as negative gearing, stamp duty and the over-generous discount to capital gains tax.

Members of the parliamentary cross bench are, though. ACT Senator David Pocock told this paper last week that these reforms are among his top priorities in any negotiation with the major parties.

Pocock would limit negative gearing to one property and grandfather the existing 50 per cent capital gains tax discount for existing rental properties, while limiting it to 25 per cent for newly purchased, newly built rental properties.

The Greens would similarly limit negative gearing to one property, and grandfather the capital gains tax, but scrap it for all newly purchased properties.

Tasmania’s Jacqui Lambie would be a little more generous to landlords, allowing maybe two or three negatively geared properties. Other members of the cross bench support variations on the same policy themes.

https://www.youtube.com/watch?v=viod_ZODrsA&ab_channel=TheSaturdayPaper

Allegra Spender, who took the blue-ribbon seat of Wentworth from the Liberals at the last election, has produced perhaps the most comprehensive analysis of what needs to change in a tax “green paper”.

She believes the most important tax reform is the replacement of stamp duty with land tax, and cites modelling that shows it would increase home ownership by 6.6 per cent. Of course, stamp duty is a state tax.

The salient point here is not that non-major parties and independents are adopting slightly differing positions on dealing with the housing crisis, but that they see electoral advantage in talking about issues the major parties are frightened of. Lambie tells The Saturday Paper that negative gearing is the elephant in the room.

“The Labor Party doesn’t want to talk about it because they think it’s what got their arses kicked in the 2019 election, and despite many economists calling for a rethink, the Liberal Party doesn’t want to talk about it either. There is a massive lack of courage and leadership from both the major parties.”

In their timidity, Labor and the Coalition keep bowling up policies that work against their other policies. Short-term policies that offer an instant benefit to a few home buyers, working at cross purposes with longer-term policies that actually address the problem, says Nicki Hutley.

“I and every other economist who’s been looking at this has said the same thing for decades. Stop throwing money at demand, you’re just going to make the problem worse. The more damage you do in the short term, the harder you make it for that long term.”

Labor at least is showing signs of realising this. There is more fibre than sugar in its suite of housing policies this election. The Coalition, not so much.

Following the savaging of his mortgage deductibility scheme this week, Peter Dutton resorted to a scare campaign against Labor.

He seized on Albanese’s evasive answer in the latest leaders’ debate to a question about Treasury modelling of changes to negative gearing and capital gains tax. He accused the prime minister of having a secret plan to change them.

Albanese categorically denied any such plan. More’s the pity.

RELATED READING

News

The men and decisions behind Australia’s housing crisis

Mike Seccombe Although there are now no simple solutions, the housing crisis in Australia can be traced back to a handful of catastrophic policy choices made by John Howard and recommended by his friends.