Economist evaluates major parties’ home buying schemes

The Liberals say their policy won’t ultimately hurt people’s retirement savings but that assumes that residential property prices will grow at a similar or faster rate than a typical super fund, according to economist Saul Eslake.

ECONOMIST Saul Eslake says anything that allows Australians to pay more for housing than they otherwise would results, primarily, in higher house prices rather than higher rates of home ownership.

During the 2022 federal election campaign the Liberals and Labor have both announced schemes designed to help people buy a home and Mr Eslake said both would lead to increased house prices though Labor’s scheme would have less of an impact.

Labor’s proposed Help to Buy plan is designed to help more people buy a home sooner by cutting the cost of buying a home by up to 40 per cent with the scheme open to 10,000 Australians each year.

Under Labor’s plan homebuyers will also avoid the need to pay lenders mortgage insurance, representing an additional saving, depending on purchase location, of potentially more than $30,000.

To pay for its housing affordability polices, Labor says it will double foreign investment screening fees and financial penalties – with the changes starting from July 2022 and raising about $445 million over the forward estimates.

The Liberals’ proposed Super Home Buyer Scheme is designed to allow first homebuyers to invest up to $50,000 or up to 40 per cent of their superannuation (whichever is less) to help them buy their first home.

The scheme would help Australians buy their first home sooner by reducing the time to save a deposit.

The policy says the scheme will also help with the cost of living and reduce mortgage stress by boosting the deposit used to buy the house and lowering repayments – saving thousands of dollars a year.

“Allowing your super to work for you to buy your first home and then being returned to your super at a later date achieves the best of both worlds – home ownership and retirement security,’’ the policy says.

The Liberals have not released any modelling on the effect on house prices from their proposed scheme.

Mr Eslake said Liberals’ scheme would, prima facie, enable singles to pay up to $250,000 and couples up to $500,000 more for housing than they otherwise would (based on the maximum amount people can take out of their super, which then becomes part of their deposit, against which they can then borrow up to as much as four times, assuming a 20 per cent deposit requirement) so it would lead to higher house prices.

“And there is no annual cap on the number of people who can take this up – unlike the government’s deposit guarantee schemes, or Labor’s ‘shared equity’ scheme announced during the election campaign,’’ he said.

“Nor are there any limits on the income of applicants, or on the value of the property purchased using the scheme.

“The only constraining factor is likely to be: how many aspiring first home buyers have that much money in their super?’’

He said the scheme would be warmly welcomed by the 11 million or so voters who already owned at least one residential property, and especially by the 2 million or so voters who owned two or more properties.

“It may be welcomed by the much smaller number of would-be first home buyers who have the capacity to take advantage of it, although you’d want to ask, how many of them actually are there – and if a young would-be homebuyer has been paid so much that they have been able to accumulate that much super, why do they need to draw it down in order to buy a first home?

To pay for its housing affordability polices, Labor says it will double foreign investment screening fees and financial penalties.

“But it will be greeted with despair, I suspect, by the majority of the typically 100,000 people a year who succeed in becoming first-time buyers – and the presumably larger number who would like to but have been unable to become first-time buyers.

“And it will be greeted with similar despair by those who, like me, have spent years wishing that politicians would actually learn something from the evidence of the past six decades.’’

He said the policy also reflected that the Coalition disliked superannuation – because it conferred greater powers and influence on unions than their declining membership would otherwise allow them to have – other than as a vehicle for allowing older Australians to pay less tax, as evidenced by the recently announced policy of expanding eligibility to transfer house sale proceeds into superannuation.

“Although the government says its policy won’t ultimately hurt people’s retirement savings because they’ll have to tip the amount plus the capital gain on it back into superannuation when they sell the property they’ve purchased, that assumes that residential property prices will grow at a similar or faster rate than a typical super fund.

“That has been true over the past 20-30 years – but precisely for that reason may not be true over the next 10, 20 or 30 years.

“Moreover, people don’t normally leverage into super, whereas they do into residential property, so this scheme exposes people to greater overall asset price and interest rate risks than they would otherwise face, as well as possibly encouraging them to make what could turn out to be a bad ‘asset allocation’ decision.”

Mr Eslake said Labor’s Help to Buy scheme, which was partly based on WA’s long-running Keystart program, would put some upward pressure on prices – because it enabled those who accessed the scheme to pay more for housing than they otherwise would.

“But it has three design features which limit that impact (1) there is a maximum of 10,000 places per year, (2) there is an income test on applicants and (3) there is a ceiling on the value of properties that can be bought with it,’’ he said.

“Additionally the Labor scheme does have a small incentive to purchase new rather than established dwellings, so arguably it tries to do something to boost housing supply, rather than merely inflating housing demand.

“Last, Labor’s scheme isn’t restricted to first home buyers, so it will for example help people who find themselves not owning a home because of relationship breakdown – a situation more often confronted by women than men.’’

To be eligible for Labor’s scheme you need to satisfy the following criteria:

  • Be an Australian citizen of at least 18 years of age.
  • Earn $90,000 or less per annum for individuals, or $120,000 or less per annum for couples.
  • Live in the purchased home as your principal place of residence.
  • Not own any other land or property – either in Australia or overseas.
  • Have saved the required minimum 2 per cent deposit of the home price and qualify (and can finance) the remainder of the purchase through a standard home loan with a participating lender.
  • Pay for any associated purchase costs like stamp duty, legal and bank fees. Homebuyers will also be responsible for ongoing property costs like rates, strata and any other bills.