Summary

The Liberal Party’s promise to provide deposit insurance for loans to new home buyers correctly diagnoses that the housing affordability challenge is saving a deposit for the first home, and will achieve its aim, unlike Labor’s abolition of negative gearing and 50% increase in capital gains tax.

But it is not good policy, and there is a better way of achieving the same outcome – allowing first home buyers to borrow from their superannuation to top up other savings, as we suggested three years ago.

Analysis

• Housing affordability as measured by repayments is not materially different in most capital cities to what it was in the 1990s. See our latest housing affordability index.
• The time taken to save a deposit is approximately twice what it has historically been.
• As interest rates have fallen, property prices have risen and repayments per dollar borrowed fallen. So repayments have stayed comparable over time, but as asset values have increased, so has the size of a deposit.
• The Labor Party’s “solution” is to abolish negative gearing and increase capital gains tax by 50%. At the same time they claim (see latest here) that their policies will not decrease house prices. If they don’t decrease house prices they can’t increase housing affordability and are merely a tax grab masquerading as an affordability policy.
• The government’s policy will increase housing affordability without lowering prices by allowing more first home buyers to enter the market with a smaller deposit. It may even push prices up a little. So achieves its aim.
• There will be an increase in risk to the government and also to the first home purchaser through this scheme, which in the case of the purchaser is probably unacceptable.
• Because most of the increase in house prices have been driven by lower interest rates (see RBA research) large increases in house prices are over, as the interest rate cycle has reached its peak. That means that equity in a house will derive more from repayments than asset appreciation, contrary to recent experience.
• That makes a 5% deposit a risky proposition for a first home buyer, leaving them little fat if they lose their job, or suffer a pay decrease, and potentially leaving the government to meet the loss.
• We suggest that the better alternative is to allow the first home buyer to borrow the balance of their deposit from their superannuation fund where there should be adequate savings to support what is still the best retirement investment anyone can make – their own home.

Comment

“We welcome the Liberal Party’s recognition that the real problem in housing affordability is saving the deposit, but can only offer lukewarm support to their solution. The best thing that can be said about it is that it is a genuine solution, unlike the ALP’s negative gearing and capital gains tax proposals.” Graham Young Executive Director, Australian Institute for Progress.