The Australian Government’s

“Help to Buy Housing Equity Scheme”, much more harm than help

At a time when the main problem facing the housing market is excess demand, the Australian Government puts forward a counter-productive joint equity first time buyer’s scheme that can only make matters worse.

Introduction

Just when it did not seem possible for Governments to design any more well-meaning but potentially disastrous home ownership schemes the “Government equity in first home buyer scheme” comes along. Politicians have a long history of distorting the housing market by offering incentives to buyers through first home buyer scheme and similar policies as well as inducing over-investment through negative gearing schemes. All this has done is to add more heat to an already overheated market and provided windfall income to sellers and real estate agents (The Housing Market in Australia and Ways to Quickly Free it Up, www. johnmangan.com.au)

Government Plan to Take 40 Percent Equity in First Home Buyers

The Australian government recently  proposed to take up  to a 40 percent equity stake in first home buyers’ properties. This initiative aims to address the growing housing affordability crisis, particularly for young Australians and low to middle-income earners who are struggling to enter the property market, particularly in the capital cities  By taking an equity stake, the government effectively becomes a co-owner of the property, which lowers the initial purchase cost for the buyer but creates a myriad of future problems both for the individual and for Australia’s public debt position.

On the surface , there are some potential benefits from the scheme such as:

• Increased Accessibility: The primary potential benefit of this scheme is that it makes homeownership more accessible to a broader segment of the population. By reducing the upfront financial requirements, more individuals and families can afford to buy their first home.
• Reduced Financial Stress: With the government covering a significant portion of the property cost, first home buyers can avoid taking on large mortgages, which can be financially stressful and risky, especially in a volatile market.

However, the fundamental flaw with the scheme stems from a failure to understand the structure of the contemporary housing market in Australia and a reluctance to accept the distortion introduced into this market through previous ad-hoc Government policies.

 Structural imbalance and market failure in the housing market

 Government policy over the three decades represents a misunderstanding of Australia’s housing needs and has resulted from a tendency to try to please all sections of the economy from the demand side, while neglecting the supply side. As a result, the ratio of average earnings to home prices, which remained relatively constant from 1975 to 1995 (at around 4 percent) by 2023 had risen to 10% (Buying a house in the 80s versus today | Finder). To cater to the aspirational middle class, Government tax policies such as negative gearing have promoted  housing as the default investment strategy in Australia and produced an environment that  that lead to multiple property ownership.

Approximately 21% of Australian households own one or more residential properties in addition to their primary residence. Among these, nearly three-quarters own a single additional property, while about 4% own four or more properties (Housing Occupancy and Costs, 2019-20 financial year | Australian Bureau of Statistics (abs.gov.au)

Negative gearing and generous tax deductions for improvements to rental properties are largely responsible for this situation. At the same time 31% of Australian are renters. (Housing Occupancy and Costs, 2019-20 financial year | Australian Bureau of Statistics (abs.gov.au) While for some this is by choice, others are prevented from entering the housing market by the failure of wages to keep pace with house prices, much of which is driven by aspirational housing investment.

Other problems with the scheme include

 Government Involvement: Government involvement in private property ownership will lead to bureaucratic inefficiencies and complications in property management and resale.

1. Long-term Financial Implications: There are concerns about the long-term financial implications for both the government and the homeowners. For the government, the financial burden of maintaining such a scheme could be substantial. For homeowners, the equity stake means they will have to share any future capital gains with the government, which could reduce their overall financial benefit from property ownership.
2. Partner break ups Thirty-one percentage of first marriages in Australia end in divorce. (Divorce in Australia: The Statistics on Why Marriages End – 2023 (clintonpower.com.au) In that case the house ownership would be divided even further. Divorce settlements require urgent property sale and in this case the Government may face a substantial capital loss.
3. Transfer of ownership or house modifications, will it be necessary to get bureaucratic consent for any proposed renovation or sale?
4. Will any previous benefits such as rent rebate be removed, thereby creating a potential poverty trap?

A better and simpler policy

The current misallocation of housing space can be reduced by a change to the downsizing rule. At present couples who downsize can add $300,000 each to their superannuation. If one partner has dies, the maximum allowance stays at $300,000. With houses in the capital cities averaging $1.5 M there is considerable scope to increase this incentive to downsize therefore increasing the available family sized housing stock. As the natural place for downsizers is units, this could help the growing problem of over-supply of units in the capital cities (Sydney suburbs where apartment oversupply is becoming a major issue for buyers – realestate.com.au) by increasing demand from downsizers. Currently In Australia, nearly one in four homes consists of a single occupant.(Housing Statistics in Australia to Get You Thinking in 2024 – Accumulate Australia) Additionally, a significant portion of homes with three bedrooms are occupied by just one or two people.(Fewer occupants, more bedrooms: census shows Australians prefer bigger houses :theconversation.com) These  data  highlight the decrease in the average number of people living in single-family homes over the past fifty years.

The failure to recognise the potential value of this trend to help free up housing space  is just another example of Governmental reluctance to forego revenue (of potential superannuation tax) in a short-sighted manner while at the same time financing blue sky and destructive schemes such as the shared home equity scheme.

Conclusion

The Help to Buy Scheme is another example of well intention (hopefully) but ill-thought-out policy design, it will make matters worse by further inflating a market already characterised by excess demand. The problem is affordable supply. A useful start  could be made by reallocating the existing stock of  housing to fit the current demographics of the population.