Monday, March 9, 2015

Two ways of making housing affordability worse

In the space of one week, we've heard two housing policy suggestions – one from each side of politics – that would make affordability problems worse.

NSW State Opposition Leader Luke Foley has suggested changing the rules regarding stamp duty, so that first home buyers could pay the duty in installments over some years.

When you think about how stamp duty actually works, this isn't a good idea.

Under the law, it is the buyer of a property who liable to pay stamp duty. However, because of the prospect of this cost, prospective buyers will tend to keep back some of the money they might otherwise put to buying the property (ie 'I could go as far as $x, but I know I'll have to pay stamp duty of $y, so I'll just go to $x-y"). This means that while the buyer actually pays it, the burden of stamp duty falls on vendors. It also means that some would-be transactions end up not taking place at all.

There's good and bad to this; on balance, more bad than good (it is a bit of a break on speculation, but it is also a break on people transacting for good reasons like household change and workplace change, because each time they move they get hit with a cost).

The problem with Mr Foley's suggestion is what it does to the thinking of prospective first home buyers. Instead of limiting themselves to '$x-y', they can bid further (to '$x')... and hope that increased wages or some other future gain will pay those stamp duty installments when they become due further down the track.

The result: first home buyers are worse off. They pay more to the vendors, and the burden of stamp duty currently borne by vendors gets shifted to buyers.

This isn't the reform that first home buyers, or anyone else affected by stamp duty, needs. It would be better to abolish it altogether and, so that all those dollars ('$y') previously held for stamp duty don't just go straight into higher house prices, broaden the base of land tax.


The other way housing affordability could be worsened is to allow people to access their super funds for money for housing, as suggested by the Federal Treasurer, Joe Hockey, last week.

Just a moment's thought is enough to see what the effect of this would be: just so much more money to throw – or, more precisely, to lever up and throw – at housing. There's no improvement in affordability: just higher prices, additional encouragement to speculators, and a further shift of wealth from young households to older households.

To be fair, the Treasurer has merely said that he is 'prepared to look at' the idea, it being something that gets pitched to him from time to time by various interests – most recently, the Real Estate Institute of Australia. But as a Treasurer who has declared himself to be most concerned about 'intergenerational theft', he should be knocking it straight back.

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