Budget needs a sharper policy scalpel to help first home buyers

In its 2017 budget, the federal government repeatedly stated its preference for a “scalpel” rather than a “chainsaw” or “sledgehammer” approach to demand management in the housing market.

The number of housing measures in the budget are more wide-ranging than in previous budgets of recent times. Policy levers on both the supply and demand side have been incorporated within a raft of housing measures. The government claims this is a “comprehensive package that can make a difference”.

However, do the demand measures go far enough to make much-needed inroads into the housing affordability crisis now facing an entire generation of would-be first home buyers? Or is the so-called scalpel too blunt to make a meaningful difference for them?

First Home Super Savers Scheme

The budget’s key housing measure for helping young people gain a foothold on the home-ownership ladder is to allow first home buyers to use up to A$30,000 of voluntary superannuation contributions for a deposit on their first home.

Clearly, the scheme will attract the tax advantages of superannuation. Therefore, in principle, it will help first home savers accelerate their savings to buy a home, thus bridging the deposit gap, while protecting superannuation savings accumulated through compulsory employer contributions.

However, at least two key questions are pertinent.

The first relates to how many first home buyers will likely be well positioned to make voluntary contributions to their super saving account. There appears to be a general reluctance among Australians to make voluntary contributions.

Existing research has found household budget constraints are a major barrier that make it unaffordable for many to make voluntary superannuation contributions. Poor financial literacy and lack of knowledge of the superannuation system are other factors.

The second key question relates to the scheme’s impact on property prices. The scheme does not aim to ease demand pressures in the housing market. It is likely that high house prices will not be curbed, so the prospects of home ownership will continue to fade for many first home buyers.

Existing demand-side levers, including the First Home Owners Grant and stamp duty concessions for first home buyers, have not succeeded in improving the affordability of houses for most young people. Hence, it is difficult to see how an additional demand lever such as the First Home Super Savers scheme is going to have a substantial impact on affordability.

This is not to say that the budget has completely ignored the need to temper demand tensions in the property market.

Demand pressures can be eased via measures that target two other types of property owners – older home owners and property investors. The budget does contain measures that target both groups. Yet again, the question remains as to whether the levers are long enough to produce meaningful impacts.

Targeting older owners and property investors

Older downsizers aged over 65 years will be allowed to channel up to $300,000 from the sale proceeds of the family home into their super fund.

Many older home owners are living in larger dwellings than they need after their children leave home. Helping elderly home owners – sometimes coined “last home buyers” – to downsize into smaller dwellings can free up larger homes for first home buyers in earlier stages of life who are forming families.

However, the impediments to downsizing are many. These include financial barriers but also non-financial barriers. Importantly, most elderly home owners have strong emotional attachments to their family home and local community.

However, a lack of appropriate and affordable dwellings in neighbourhoods where older owners would like to stay also poses barriers to downsizing. For downsizing reforms to be effective, financial incentives will need to be accompanied by supply-side solutions that broaden the diversity of the housing stock so older home owners’ housing preferences and needs can be met.

The government has not made any significant changes to tighten negative gearing or capital gains tax concessions to reduce competition from property investors. Concern has focused on the potential contraction of private rental housing supply should investors withdraw en masse from the private rental market. However, a longer-term perspective would take into account second-round effects.

As investors sell off their rental properties, more properties will become available in the market to meet demand from first home buyers. This will not only have the impact of easing tensions in the rental market as more renters become home buyers, but it will also encourage subsequent second property investment as young career-builders seek to accumulate more wealth in their property portfolios after securing their first home.

Such second- and third-round effects need to be incorporated more into policy thinking so that policy design rests on not just short-term, but medium-to-long-term, considerations.

Is the scalpel sharp enough?

The budget contains myriad demand and supply levers that directly or indirectly aim to assist young people with their first home purchase. It represents an overdue but welcome acknowledgement on the government’s part that much needs to be done to improve home-ownership prospects for first home buyers.

A package of measures that seeks to influence both supply and demand simultaneously in the housing market is, in principle, a sensible approach to an entrenched policy concern such as housing affordability. However, in practice, policy design matters.

In the case of the 2017 budget, it would appear that the scalpel will need a whole lot more sharpening if it is to make an effective incision into the housing affordability crisis that’s plaguing an entire generation of aspiring home owners.