Friends and foes jumped all over Cory Bernardi when he suggested recently that the first home owners grant should be scrapped. Which is a pity, because the South Australian Liberal senator has raised a topic worth discussing. At some stage, Australian politicians will have to accept that the budget can no longer afford cash handouts to boost the private wealth of select groups of Australians, be they young or old.
Apart from scrapping the grant, Bernardi suggested that one option would be to convert it into a loan to be repaid in a similar manner student fees under the Higher Education Contribution Scheme. Alternatively, he said the money could be paid back, along with a share of the capital gain, when the home is sold.
As part of last October's stimulus package, the Rudd government spent $1.5 billion on increasing the first home owners grant from $7,000 to $21,000 for new homes and $14,000 for existing homes. The states top up these grants, despite constantly claiming to be short of money. NSW and Western Australia each adds as much as $21,000 to the commonwealth grant. The ACT offers stamp duty concessions, but the cost is limited by a means test.
The first home owners grant is due to revert to $7000 on July 1. Although there is no good public policy reason to do so, the government is under strong pressure to extend it. The increased grants are meant to help the building sector during the recession. But the Housing Industry Association estimates that 75-80 percent of the grants are for homes that have already been built.
Helping people buy second hand houses may have political appeal, but it does nothing to help builders. There were better options that would actually boost the building sector, rather than waste around $1 billion on subsiding the purchase of second hand houses. The ANZ's chief economist Saul Easlake has suggested this money should have been allocated to the government's new scheme to build affordable rental accommodation.
The much smaller proportion of the grants that goes to buying new homes has undoubtedly helped the construction industry. The latest figures show that first homebuyers accounted for 26.5 percent of new housing purchases in January — the highest figure since the data was first collected in 1991. But other government stimulus measures are now starting to kick in, including extra spending on community housing and massive outlays on new school buildings.
The housing minister Tania Plibersek is relying mainly on community groups and the private sector, rather than state housing departments, to deliver the benefits of the big increases in spending on affordable rental accommodation that she wants to act as "a spring board allowing people to land softly and then jump out of disadvantage".
Shortly before Bernardi called for the first home owners grant to be scrapped, or repaid, the coalition leader Malcolm Turnbull sacked him from a junior position on the opposition front bench. Turnbull over-reacted. Bernardi's offence was simply to claim that an unnamed parliamentary colleague had told him that he would have joined the Labor party if he lived in a Labor seat.
Because the Coalition is committed to extending the increased home owners grant after June 30 — at least for new buildings —Turnbull had to reject Bernardi's criticism of the policy. But this leaves Turnbull in the awkward position of slamming the government's stimulus packages as too big, but wanting to spend more on one component that is due to expire on June 30.
Bernardi also says that he can’t see how it is good use of taxpayers' money to give thousands of dollars to people so they can commit themselves to a large, long term loan. He says, "At the current low interest rates, taking on a large debt might not seem too threatening. However, how are these same first home owners — who couldn't save a deposit of their own — going to manage their obligations if they lose their job or get caught by rising interest rates?" The Commonwealth Bank's chief executive officer Ralph Norris has voiced similar concerns.
For years, all sides of politics have shed crocodile tears about how rising prices made it harder for young people to enter the home ownership market. At the same time, they encouraged existing property owners to enjoy rising capital gains. Easlake warns that expensive grants to first home owners don't really make housing more affordable. All that happens is that demand for houses increases, putting further upward pressure on prices and making it harder for the next generation to enter the market.
Despite the government's public commitment to cutting middle class welfare to make room for spending on areas that boost the productive base of the economy, there is no means test on the first home owners grant. Nor is there any requirement that it be used to pay for installing technology that provides a community benefit by reducing water consumption or the use of electricity from emissions intensive sources.
The budget looks like suffering a revenue shortfall of at least $120 billion over the next four years. Repairing the damage means that the handout mentality has to come to a screeching halt. People who want to build their personal wealth by buying their first home should save up until they can afford it.