When are the short-term vote-grabbing politicians going to learn?
This is how markets are meant to work: property prices go up, they get very expensive, people are priced out and demand falls away. Then property prices go through a natural softening or stagnation phase. Over time wages rise and with property prices flat, affordability improves. This is a natural process and takes time.
This is how markets now work in the modern day political system: property prices go up, they get very expensive, people are priced out and governments panic that they won’t be re-elected. To improve their re-election chances they introduce incentives, grants or schemes in order to keep participation rates high in a very expensive market. Property prices stay high and keep rising thanks to tax-payer money. Property-holders and developers receive the major benefit. Governments realise they can’t fund grants and schemes indefinitely and withdraw the tax-payer hand outs, leaving first home buyers more and more disadvantaged every time.
Governments do have a role to play on the issue of affordability, and they have two levers to pull: Demand and Supply
Any Demand Levers – grants, schemes, concessions, or other incentives – have always proven inflationary. Inflationary, because it causes property prices to rise, and in almost all cases, rise higher than grants, schemes or concessions – meaning they are completely counter-productive.
Recent examples: the first home buyer grant, the doubling of the first home buyer grant, off-plan stamp duty concessions, first home buyer stamp duty concession and the most recent proposal – a co-purchasing pilot program.
Why would governments put in place measures to make prices more unaffordable for the next generation? There are only two answers to this question – they are incompetent on this issue or they do it to improve their election chances – or both. Most of these packages are announced just before an election, clearly to win over first home buyers and parents of first home buyers.
When markets are unaffordable we are of the firm view that governments should not be pulling any Demand Levers – as any Demand Levers induce more demand. And why would any tax-payer want their money dedicated to pushing up an already unaffordable property market – surely there are more productive ways to use our taxes? Demand Levers should only be enacted to pull a market out of a slump, not to perpetuate a price boom.
What is needed during an unaffordable market is the Supply Levers to be pulled.
The recent accouchement of vacant residential property tax in Victoria is an excellent example of this where properties vacant for more than 6 months will be slugged a property tax of 1% of its capital improve value (market value). This should increase supply and put downward pressure on price.
The overdue federal enforcement of illegal purchases is also another good example of a Supply Lever. This is currently putting properties back on the market (albeit slowly) and it will also deter foreigners for attempting to purchase illegally in the future as well.
The problem is there are now policies on both the demand and supply sides working against each other. The Victorian government has recently increased stamp duty and land tax for foreigners – stamp duty on a $650,000 property will be $80,000 – $30,000 more than any other state in Australia. This will slow down supply. And the Victorian State government has also abolished stamp duty concessions for off-plan property further adding to a slow down of supply.
Melbourne and Sydney are very expensive however they are currently going through a normal cyclical price cycle. It’s important for governments not to panic and realise their role in this situation. And that is to focus solely on Supply Levers. Federal and State governments still don’t have clear and consistent sets of policies to deal with this situation and are wasting tax-payer money in the process.