The true purpose behind housing policy.

Any regular reader of Property Observer will be well aware of the industry wide aversion to first home owner grants.  Steven Keen was one of the first to highlight their effect on the market when he aptly named them ‘Vendor Grants,’ and last week Ray White chairman Brian White made a similar call when he termed the increased Victorian stimulus for first home owners purchasing new accommodation, nothing more than a “builder’s incentive.”

Even the REIV who have been broadly in favour of retaining first home owner grants, have expressed their frustration at the liberties State Government take when ‘manipulating’ the market through annual ‘tinkering’ with our most price sensitive demographic.

Treasurer Michael O'Brien has suggested “Victorian families (purchasing new accommodation) will be over $16,500 better off with the combination of the increased grant and stamp duty cuts” however; surely no one is under the false conception that this move has anything to do with easing affordability?

Its basic economics – if you channel an increased supply of money by way of ‘candy’ style incentives into any one sector, competition increases and so to do prices. Any advantage the grant offers is quickly wiped away and buyers invariably end up paying ‘more’ rather than less.

As an example, in 2008/9 during which the first home owners ‘boost’ was offering an extra $14,000 on top of State grant of $7,000 for anyone purchasing new accommodation. The rush of buyers to ‘get in quick’ before the grant was inevitably stripped away resulted in prices escalating in excess of 20 per cent in fringe suburbs such as Tarneit and Werribee South.

If you work out the dollar equivalent on the median house price in these localities, the ‘extra’ paid is in excess of $70,000 - so no saving there – and as with all smarty style incentives, as soon as they’re stripped away, first-home buyers who were encouraged to buy on a “whim” are left sitting on a nice pot of negative equity with no ‘rainbows’ on the horizon.

Of course, State Governments are well aware of all these facts – so to openly mislead the public with affordability ‘sound bites’ is at worst, lying, and best insulting – they don’t deserve a seat.

Rather the policy takes advantage of the inexperienced property buyer luring them in with a seemingly ‘generous’ handout, in order to provide a much needed boost to the construction industry which, as indicated by the RBA – is expected to ‘buffer’ any void resulting from a slowdown in the mining sector, and in the near term, will assist in soaking up the oversupply of ‘new’ accommodation prospected to hinder growth in Victoria’s property market, as we traverse through the remainder of 2013.

All such grants which are primarily aimed at the new home market play their part in increasing demand – but they are temporary measures only.  Is it too much to ask for ‘real’ sustainable policies which address the hefty taxes, levies and fees currently making up what the HIA estimate to be 40 per cent of the cost of a new home?

Or am I making the mistake once again of being brainwashed by “policy speak” - imagining our housing market is designed to provide the population with affordable shelter over and above a simple revenue raising tool?

As every Joe on the street will tell you – if you really want to encourage the buying market to “spread over the land,” the simple answer is to raise the dollars needed to fund essential infrastructure at the start of the process – principally roads and public transport – not 20+ years down the line.

In this regard, economist Leith Van Onselen is at the forefront of ‘good’ ideas when he suggests raising money through bond financing and recouping it from ratepayers over a period of 30 years.

Similar ideas can be found in Houston Texas in which a successful expansion of their city boarders is funded with policies such as ‘MUD’ – a ‘deductable’ Municipal Utility District tax – in which a panel of property owners sit on a government appointed board to oversee utility and infrastructure distribution in the area. The amenities are initially funded by a bond which the residents pay back proportionally over a lengthy period of time. It works as less of a disincentive to migrate outwards than an upfront fee which is piled onto the capital cost of their initial purchase, with residents openly active in allocating where and how the funds are distributed.

Buyers typically follow train lines – if they can commute to existing work places whilst living further afield, the increased population encourages small business and larger job centres away from the centre thus releasing cities from their ‘donut’ outlook.

However, currently, our outer suburbs are developing into what some term would term ‘ghetto’s’ – on the recently released ABS data which ranks geographic areas across Australia in terms of their relative socio-economic advantage and disadvantage.  A map can be constructed which highlights diversities such as incomes, education levels, occupations, rent and mortgage payments, family structure and unemployment.

The ‘fringe’ suburbs are beetroot red and bright orange and sit well away from the affluent dark blue vicinities.  They are suburbs first home buyers or families - supposedly ‘moaning’ about inner city house prices - are encouraged to “migrate” and raise their children - areas without adequate schools, transport, and recreational facilities.

Throughout 2011-2012, the City of Wyndham in Victoria has experienced the biggest population growth of any municipality in Australia - attracting 12,822 people. Point Cook, a suburb of Wyndham which was expanded in line with Melbourne’s 2030 plan – was initially marketed as “A thriving neighbourhood … just 22 kilometres from Melbourne’s CBD” with “convenient access to established schools, shopping, recreational facilities and public transport.”

However, last year Bill Forrest – director of advocacy with the Wyndham City Council – painted the true picture when he was quoted ”They [the state government] have not kept up with schools, they have not kept up with arterial roads, more than 50 per cent of Point Cook is more than 400 metres from a bus stop,”

In response to the long winded cries from residents situated in Melbourne’s outer west, $72 Million is to be set aside in this week’s Victorian Budget to upgrade existing roads and infrastructure as the capital of Wyndham – Werribee - continues to expand into what is intended to be a major new ‘job hub’ - East Werribee.

Planning Minister Matthew Guy has stressed the “Government is doing everything we can, within Budget constraint, to invest in the west," however, whilst the funding is welcome, it’s quite honestly, too little too late. Notwithstanding, the blame sits as much on previous government’s shoulders as much as it does the current.

It’s all very well talking about further land releases – once again under the guise of ‘aiding’ affordability – however, without fixing the above issues we’re simply sitting on a merry go round of repeated mistakes. There’s little sense creating new suburbs of sprawling Mc Mansions where the trade-off of a bigger house is of little consequence once you step outside the front door.

As for the inner suburban locations – our housing market is a private debt laden bubble riddled with a broad demographic of buyers and investors competing for the same golden nuggets of established real estate – typically in the lower to middle median price bracket.

Whilst Melbourne may be making headway in the lead to population supremacy, it’s not the growth that has inflated the cost of our established housing market – rather it’s policy that encourages credit expansion based on speculation. Sydney – which has made fewer inroads to effectively their increasing their housing stock in response to population growth sits in a worst position.

Reports released from the ATO show from the one in seven who own an investment property, whilst one in ten tax payers’ are negatively geared.

It’s broadly assumed the policy of negative gearing subsidises renters. However, the offset of increased competition in the established market (which is further inflated through capital acquisitions in SMSFs) inflates the price of existing accommodation in a never ending game of musical chairs.

In this respect, negative gearing has done an excellent task of ensuring renters stay renters as lower and middle income individuals find themselves priced out all together – unable to save enough in the race to ‘keep apace.’

Considering the same report highlights a collective lost in excess of $13 billion over the 2010/11 financial year for those who employ the strategy, it’s no wonder the focus centres on the established market with the hope history will repeat itself and enable investors to compensate through the capital growth of their asset, without which there is little sense to the purchase.

Unfortunately, the latest media release from R P Data may disappoint those chasing an increase in the core value of their investment as it seems ‘real’ growth in the Australian property market is at a current or “similar level” to that recorded almost 6 years ago.

Or to quote R P Data’s research analyst - Cameron Kusher  “Although nominal values have risen over recent years, in real terms, capital city home values are currently at a similar level to what they were in September 2007.”

Once again, it emphasizes the need for investors to adopt a ‘low growth’ mindset as we move into an atmosphere which the RBA have termed in their “Housing and Mortgage market” outlook, to be the ‘new normal’ – principally, lower capital returns that typically track the rate of inflation.

All in all, we make nice puppets for our governing bodies. Bombarded with stats that suggest inflation is well contained, whilst in reality, the cost of living has rocketed with many still waiting for the wage rises for which ‘we’re told,’ have more than compensated.

If nothing else, let’s celebrate the freedom we have to make our distaste for current Government policy evident. It’s a tad more satisfying than staring blankly at a ballot paper in September, knowing the next ruling party will no doubt provide more of the same.

Catherine Cashmore