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The Forum > Article Comments > Billions of dollars wasted on grants to first home buyers > Comments

Billions of dollars wasted on grants to first home buyers : Comments

By Saul Eslake, published 17/3/2011

Has any government policy than the first home buyers grant been pursued for so long by so many for so few results?

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Another one who gets to the station long after the gravy-train has left.

Those politicians did not give grants to promote ownership but to prolong their stay in power.

And their pretence was ‘liberalism’.

Come-on, Mr. Eslake! Why economists were so silent when it all happened?
Posted by skeptic, Thursday, 17 March 2011 10:40:11 AM
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Mr Eslake demonstrates once again the gulf between economics and politics. Ne'er the twain shall meet, it would appear.

The tale of how successive governments have tinkered with this form of electoral bribe is a classic example of the triumph of the sound-bite over sound thinking.

Whenever it is introduced, it is accompanied by a governmental fanfare of how they are "helping the battlers", or some such flannel.

Governments know, from long experience, that the electorate has the attention span of an amphetamine-fuelled gnat, and a grasp of financial matters similar to that of my goldfish. So they call it a "policy", wrap it up in pretty paper and dance around a bit, going "lookit moi, lookit moi", fully expecting the voter to be dazzled by the pretty colours and the warm, sincere tones.

Works.

Every time.

Never confuse government policy with reality, Mr Eslake. That way lies madness.
Posted by Pericles, Thursday, 17 March 2011 12:59:28 PM
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The grant raised the price of houses by the value of the grant and thereby cost the purchaser the same amount. It was a First Home Vendors grant as Steven Keen puts it. The money went to the vendors.
Posted by Atman, Thursday, 17 March 2011 1:31:49 PM
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Not so, Atman. The vendor did not make a cent out of that deal.

Steve Keen was lying and he knew it.

Who was billed for that grant were exactly you and me.

We did not receive a formal invoice, but inflation, otherwise known as political robbery, is a silent, progressive and malicious tax at the whim of politicians and their associates.

Long live our inflating democracy!
Posted by skeptic, Thursday, 17 March 2011 7:14:53 PM
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"Skeptic", you are wrong, wrong, wrong in accusing me of being "silent" about this "while it all happened". As no less an authority than the founder of OLO himself, Graham Young, can attest, I have been advocating the abolition of cash grants to home buyers for more than 30 years, including during the 14 years while I was at ANZ. I was throughout this time also an advocate of abolishing, or restricting, "negative gearing", notwithstanding that funding negatively-geared property investments was profitable business for my then employer.

So by all means say I am wrong, if you think I am (and especially if you can actually adduce some evidence that I am), but don't accuse me of being cowardly - especially when you don't have the intestinal fortitude to put your name to your comments.
Posted by Saul Eslake, Thursday, 17 March 2011 7:58:12 PM
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I'm with Saul. Back in the early 80s when we were both active in Young Libs (Saul was federal president the year after I was federal vice-president) he was campaigning against it.

I was a bit slower to work it out, but then as an arts student I had a handicap, but I remember being convinced somewhere around 83/84.

I remember at the same time Saul was also campaigning against the damming of the Gordon below Franklin and had some strong things to say about the Tasmanian Hydroelecticity Commission, which didn't make him very popular with the Tasmanian Liberal Party who were very gungho.

The last thing you can accuse Saul of is lacking ticker, and I think you should apologise.
Posted by GrahamY, Thursday, 17 March 2011 8:46:13 PM
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The grant raised the price of houses by the value of the grant and thereby cost the purchaser the same amount. It was a First Home Vendors grant as Steven Keen puts it. The money went to the vendors.
Posted by Atman, Thursday, 17 March 2011 1:31:49 PM

Atman, you are correct, and may I say, it was the Real Estates and Real Estate Institute in each State that capitalised on the last First Home Owners Grant directly caused by the Labor Government who gave little notice to people who had just sold their homes, seeking another home, most of which were put on the market for another $30,000-50,000. Greedy sneaky real estates, some of whom, did not inform vendors who had just put their homes on the market, that they could sell for more either. It affected vendors too that had only just placed their homes on the market a week or two before it was advertised. I believe the Real Estate Institute through Business and Commerce alliances would have known earlier about the forthcoming First Home Owners Grant to be kicked off again.

Homes that were worth $320,000 were marketed for another $30,000, loans sought by thousands of first home owners were denied, in part because they missed out as a result of bank queues with staff being unable to process the loans prior to the cut off dates specified by Government, it caused first home owners to purchase homes well out of their reach by up to $50,000,later finding themselves in trouble financially, adding all of the problems Saul has mentioned.

Few grants were given out in my state, seriously disappointing many first home buyers.
Posted by weareunique, Thursday, 17 March 2011 10:31:34 PM
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As I pointed out in a recent post in the general forum (I would never stoop to saying 'I told you so...'), rather than giving out tax payers money to inflate housing prices, why not offer low fixed interest loans to first home buyers, capped at a reasonable amount, (say $200k.)
It would then be a 'chicken or egg' question, of whether the loan interest matched inflation, or inflation matched loan interest.
Instead of money gone, the loan fund could be self funding, and cost tax payers nothing.
Yes, it would reduce the price of existing houses, but that's due to happen anyway, and let's face it; the only way to profit from rising house prices is to ride the wave, and keep moving outwards.
It's way past time we stopped living beyond our means, and expecting our children and grandchildren to pay for our excesses.
And of course our free market banks, who love competition, would be more than welcome to compete against the gommint's low fixed interest loan package...
Posted by Grim, Friday, 18 March 2011 7:57:57 AM
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Your concept is the wisest Grim!
Posted by weareunique, Friday, 18 March 2011 8:46:36 PM
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GY>>... but I remember being convinced somewhere around 83/84.

Yes, but back then it was the 'home savers grant', a very different grant to the $14K 'hand out' grant first introduced by Howard around 2000/01.

I Myself have long been opposed to any form of 'hand out' as it simply does little for the community at large and, once 'granted', it is gone.

My suggested remedy is for a home owners 'loan'.

These loans of up to $50K should be given to those who qualify in order to establish themselves as 'home owners', they should be on an 'interest free' basis, perhaps with a 'use by date' and they should have conditions such as, The home owner can never borrow against the equity in their home until this interest free loan is repaid.

This would help prevent the over borrowing on equity for cars, boats and holidays.

Now the net effect is the similar, it helps people enter the market, however, the 'grant' remains the property of the 'tax payer' and can be used again and again to help many, not just 'one'.
Posted by rehctub, Saturday, 19 March 2011 6:10:18 AM
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Excellent Rehctub, both yours and Grim's viewpoints are sound.
Posted by weareunique, Saturday, 19 March 2011 7:54:32 PM
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The grant did in fact raise the price of houses, but indirectly in many cases.

What the grant did was allowed for more borrowers to enter the market, who, pre grant, were unable to obtain finance.

Of cause, more qualified buyers, resulted in increased demand and ultimately, increased house prices.

Where the grant went wrong was like this.

A house in the northern outskirts of Brisbane sold for about $250K.(2001)

The grant, $14K, represented the total equity in the property in most cases and, despite many claiming to be 'property gurus' the housing market boomed through nothing other than plain old luck for these folk.

Continued.
Posted by rehctub, Sunday, 20 March 2011 6:51:49 AM
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Continued

Then the rot set in and exposed a major flaw in yet another poorly implemented scheme. Home equity re-draw!

You see, that same house was worth another $100K in less than 12 months and, many owners thought they should reward themselves for being 'so clever' and take out some of the equity for a holiday, a boat, car, jet ski, or, perhaps, all of the above.

The banks loved the idea, as they were all of a sudden 'gifted' with all these borrowers who previously were 'unqualified'.

Now the banks took the view that so long as the loan to equity rate stayed at 80/20, they were safe because they had 'mortgage insurance', so, as long as property values increased, which they did, they continued to allow for re-draws as this meant more profits for the banks and made the bank johny the home owners new 'best mate', which meant they were less likely to change banks, so long as he/she said 'yes'.

Now, some ten years later, these homes are worth $500K and many of the owners now owe $400K and have little to show for it other than a few photo discs and some memories.

Their once $250K mortgage is now $400K and their property values are slipping.

This is why a 'hand out' should be reconfigured to become a 'hand up' which can be used time and time again to benefit many, not just one.

But, like most things confronting our politicians, it's all a bit to hard so they just bury their heads in the sand and focus on being re-elected.

BTW, I have long held the view that today is the first day of the rest of our lives, so it is never to late to change.
Posted by rehctub, Sunday, 20 March 2011 6:58:18 AM
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Dear Saul,

I have a little more sympathy with your issues with negative gearing than the FHBG. The figures on home ownership rates for lower age groups may well be the result of decreasing home affordability of those without years of solid savings or investment.

Negative gearing however, the last time I looked at the figures for housing investment (from memory) results in $5 Billion collected in taxes for $8 billion given in tax deductions. Or in other words $3 billion a year to middle and upper class welfare.

The FHBG at least assists those who may never be in a position to own an investment property.

As an aside I am one of the few who view our stamp duty rates as a significant handbrake on overheating housing prices. What would happen if they were abolished is a frightening prospect.

The capital gains deductions of 50% for an individual and 33 1/3 % for Super funds in 1999 to me seemed to be a substantial contributor to the house cost to average wage ratio doubling in my capital Melbourne from 2.3 in 1995 to 4.6 in 2010.

Directing favourable negative gearing and capital gains deduction regimes at new housing only would to me have a far greater benefit than removing FHBGs.
Posted by csteele, Monday, 21 March 2011 12:43:52 PM
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'csteele', I agree with you entirely about the adverse consequences of 'negative gearing'. Most Australians don't realize that this is a phrase that people from other English-speaking countries don't understand - because they don't have it. In the United States, for example, investors in rental property (or indeed in any other asset) can only claim interest expenses as a tax deduction in any given year up to the level of income generated by it (in the case of an investment property, rent net of expenses); any excess has to be 'carried forward' against the capital gains tax liability crystallized when the asset is sold.

Particularly after the Howard Government's 1999 decision to halve the rate of capital gains tax (one supported by the then Labor Opposition), negative gearing has become a vehicle allowing those who use it (overwhelmingly, upper income taxpayers) to convert wage and salary income taxable at their marginal rate, in the year in they earn it, into capital gains taxable at half their marginal rate, in a year of their own choosing. No wonder, therefore, that since this change, 70% of property investors report 'running losses', amounting (in 2007-08, the latest year for which figures are available from the ATO) to $12.8 billion in aggregate.

This subsidy to property investors has, like other forms of assistance to buyers of properties (including First Home Owners' Grants) has been capitalized into prices, thereby making housing affordability for those whom governments profess to be concerned more, rather than less, difficult to achieve (continued)
Posted by Saul Eslake, Monday, 21 March 2011 7:01:25 PM
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While the idea of restricting negative gearing to investors who purchase new properties has some intuitive appeal, that would be open to criticism from property investors that it discriminates against them in favour of investors in other assets (such as shares - unless negative gearing were available only to investors in IPOs - taxi plates etc.). Better, in my view, to eliminate negative gearing altogether and use the increased revenue to lower tax rates across the board.

I would, however, support the restriction of FHOGs to purchasers of new dwellings (as indeed was the case with the scheme originally introduced by the Menzies Government 38 years ago), if it can't be abolished altogether (which would be preferable).

Incidentally, I note that 'skeptic' hasn't apologized, as Graham Young suggested he should, for his unfounded and cowardly attack on my credibility. Other readers should bear that in mind when considering how much credibility to attach to his posts.
Posted by Saul Eslake, Monday, 21 March 2011 7:03:46 PM
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Dear Saul,

Since investors outweigh the first home buyers and tend to compete for much the same segment of the property market I still feel safe in flagging negative gearing as producing the bulk of the market distortion we experience.

As a relatively young couple seeking to buy our first house the assistance we received back then allowed us to purchase a good 12 – 24 months earlier than we might have done so, not a bad thing I hope you agree. For others it may well make the difference of ever getting a chance to own their own home.

Rather than directing money saved through eliminating negative gearing going toward lowering tax rates I personally would like to see it rebuilding our community housing stock.

My wife an I have availed ourselves, in a limited fashion, of opportunities in investment properties but not without some disquiet. I recall one year an estate agent we were talking to related how most of his sales in a rather poor, ex-commission house suburb were investors. One buyer drove from Sydney and bought 14 of the 15 homes he was shown without getting out of his car.

He of course needed to recruit 14 families, some of whom could well have been priced out of the ownership market buy his actions, to help pay his loans until he could realise the capital gain several years later.

It was a constant though the early days that neighbours would come up and ask if we were going to live in the house we had just purchased. Their concern was if it were to be rented out the residence would have the minimal upkeep most often afforded to leased properties. Home pride came with ownership was the sentiment, one that was hard to dismiss.

Cont,
Posted by csteele, Monday, 21 March 2011 10:30:14 PM
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Cont,

Fifteen years later the suburb is a mess with plans to raze whole sections of it.

Although we have only retained one property in the area, and that is leased to a drug offender and his young family (great tenants BTW), I still have real unease about having been part the problem.

Therefore I would not support FHOGs going to new dwellings only. Remember it only goes to owner-occupiers. I would argue it would have a community building dividend in places like the suburb I discussed. Instead I would like to see full grants restricted to the bottom 25% of houses in an area tapering out at the 75% mark.

Finally to 'Skeptic'. Should he apologise? Probably, but I feel that he was mostly generic rather than specific in his comments. They did however give the rest of us a chance to hear Graham and yourself defend your record and I personally hold you in higher esteem (for an economist :)) having been made aware of it.

The boil that is negative gearing must be lanced and the first pollie with the gumption to do something about it gets my vote.
Posted by csteele, Monday, 21 March 2011 10:31:44 PM
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'csteele', the reason I suggested that the revenue gains from abolishing negative gearing be applied to reducing marginal income tax rates is simply out of fidelity to what I've long believed (almost as long as I've believed that grants to first home buyers are a waste of public funds) is a good principle of tax reform - ie that the trade-off between a broader tax base (ie, fewer exemptions and concessions in the definition of what is taxed) and lower rates always improves simplicity, equity, economic efficiency (ie, 'neutrality' as between choices made on grounds other than their tax consequences) and compliance costs.

However I agree with you entirely that whatever money governments choose to spend on housing is much better spent on increasing the supply of it, especially for those who might otherwise not be able to afford it, rather than on inflating the demand for it, especially from those who can afford it themselves. As I pointed out in my original article, the historical evidence is that this approach actually works.

Australia has a chronic shortage of housing - equivalent to 200,000 units as at 30 June last year, according to the National Housing Supply Council (of which I'm a member). And on present trends and policy settings, that figure will more than double over the next seven years. The result will, inevitably, be declining rates of home ownership among middle-income families; increasing rates of rental housing stress, and homelessness, among lower-income families; and increasing poverty among older families who are exposed to the private rental market whilst on fixed incomes.

And yet is government policy changing in response? Not a whiff.
Posted by Saul Eslake, Tuesday, 22 March 2011 4:53:16 AM
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SE>>Australia has a chronic shortage of housing - equivalent to 200,000 units as at 30 June last year, according to the National Housing Supply Council

It is my understanding that these numbers include groups such as 'the homeless', of which many choose to be and under normal circumstances will never own a home. Is this the case?

Now as for negative gearing, you can't take away NG and leave capital gains tax.

Property investment is simply another form of investment and, if you take away the 'tax advantages', who will buy the properties that are out there being rented by the thousands who will never own a home, many of them by choice.
Posted by rehctub, Tuesday, 22 March 2011 6:22:56 AM
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Is there an actual 'shortage of houses' Saul Eslake, or is it a shortage of houses that people can afford?
I can't help but wonder if much of the problem is that government policy is directed towards the mythical 'average wage', which is around $30k more than what 50% of Australians make.
The median wage is still around $40k. A $200k loan at 3%, over a 30 year period would involve repayments of $843. a month, which is very close to 25% of a single median income; in other words, actually affordable to a young family with a young mother staying at home to look after her children.
Where could one buy such a cheap house? Certainly not in the cities or suburbs, but hey, we are in one of the most underpopulated countries on Earth. There is still plenty of space out there, and decentralisation can only be a good thing, for many reasons.
Concrete slab construction opens the opportunity for (cyclone and even flood proof) houses to be prefabricated, and built in days instead of weeks.
Yes I realise such concepts would require what is these days described as 'a paradigm shift' in thinking; what in other times was merely described as 'imaginative'.
When did we get so conservative? And why?
More to the point, why is it that 50% of Australians are constantly ignored?
With the 2 major parties crowding the neo liberal centre, and the only other player concerned more with environmental issues than human ones, perhaps it is time for another political party.
I would suggest it be called 'The Real Australian Labour Party'.
Posted by Grim, Tuesday, 22 March 2011 6:28:14 AM
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Dear Saul,

While we might be in furious agreement about negative gearing I'm afraid our views may well diverge on other aspects of the taxation/welfare system.

I have always been of the opinion that economic efficiency and simplicity should only be applied to the means of achieving social policy, not directing it nor decreeing what is worthy.

Be that as it may I want to thank you for responding to my posts. I hope that the the size of the negative gearing dragon doesn't put you off occasionally tilting your lance in its direction.
Posted by csteele, Tuesday, 22 March 2011 10:12:17 PM
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