Albanese and Dutton’s signature policies risk inflaming housing crisis

A policy clash on tax and housing has dramatically reset the federal election campaign after Labor and the Coalition unveiled more than $24 billion in combined pledges that could supercharge house prices.

Prime Minister Anthony Albanese promised a blanket $1000 tax deduction for millions of workers, while Opposition Leader Peter Dutton outlined a scheme for first home buyers to claim a tax break on their mortgage interest.

But the two leaders drew swift criticism for promising tax breaks and deposit guarantees that could fuel demand for homes without doing enough for supply, prompting economists to warn of a surge in house prices.

The competing policies came on a pivotal day for the election after a series of setbacks for Dutton in the opening weeks of the campaign, leading him to use his formal campaign launch to escalate the contest on housing.

The Labor housing policy offers billions to state governments to build more homes, but also expands a guarantee scheme for first home buyers so they could take on a mortgage with a deposit of as little as 5 per cent of the property value.

“We are not shackled by old thinking,” Albanese declared at the Labor launch. “We have the courage and the strength to choose our own way.”

Peter Dutton and Anthony Albanese’s signature housing policies were both criticised by economists.Credit: James Brickwood, Alex Ellinghausen

The Coalition plan allows first home buyers to claim a tax deduction worth approximately $12,000 a year for five years on their mortgage interest bill when they buy a newly built property, depending on their income and the size of the loan.

“I’m ready to serve Australians as the strong prime minister and steady hand our country needs,” Dutton told the Coalition campaign launch.

Independent economist Saul Eslake said the rival policies would add to pressure on housing prices, while Australian National University tax expert Bob Breunig said both sides were fuelling demand rather than increasing supply.

Economist Richard Holden also warned of flaws in both policies but said the Coalition proposal, in particular, made him “queasy” because it could encourage people to borrow more than they could afford.

“Both sides should be dialling back the demand-side subsidies,” said Holden, the Scientia professor of economics at the UNSW Business School.

“We know that they just fuel prices … and the solution is all about supply.”

Albanese and Dutton went head-to-head on housing and tax policy by holding their campaign launches on the same day, reflecting the pressure on both leaders to get their messages to voters before the Easter holiday and the start of early voting on the Tuesday after Easter.

Albanese promised a simple $1000 tax deduction option for all workers, saying they would not need to itemise the deduction to receive the benefit each year. This is estimated to cost $2.4 billion over four years.

The prime minister also outlined $2 billion in grants and $8 billion in equity injections to build more homes, with the combined cost stretching over eight years. Labor said this would help build 100,000 homes, equivalent to about $100,000 in federal assistance for each of the homes.

Under the mortgage deposit scheme, Labor will expand a policy first put in place under the Coalition to guarantee 15 per cent of the deposit for first home buyers. This means the borrower could buy a home worth $1.5 million in Sydney and $950,000 in Melbourne with a deposit of as little as 5 per cent.

Dutton unveiled his housing scheme hours after news of the Labor policy on Sunday morning, declaring he would allow thousands of Australians to cut their income tax bill to help with the cost of a mortgage.

The Coalition has assumed about 30,000 buyers would use the scheme each year, saying this would cost $1.25 billion over four years in foregone tax revenue.

The help would only be offered for the first $650,000 of a mortgage, would expire after five years and would be restricted to newly built homes to encourage construction. It would be limited to single people earning up to $175,000 a year and couples earning $250,000.

In addition to this, Dutton promised voters an income tax offset worth $1200 for all workers earning up to $144,000 a year. The full amount would go to those earning between $48,000 and $104,000 a year, with smaller offsets for others. The benefit would be paid in July 2026 and would only last one year, costing the budget $10 billion.

Neither side outlined any budget savings to pay for their policies while committing a combined $24 billion in outlays.

Both major parties insisted their plans would add to supply, with Housing Minister Clare O’Neil pointing to incentives worth $10 billion to encourage state governments and private developers to build more properties.

Coalition housing spokesman Michael Sukkar said the mortgage interest tax deduction would add to the construction pipeline because it was only available for new builds.

The claims are central to the long dispute about federal schemes that give homebuyers more money to bid up prices when economists have called for changes to zoning laws and cuts to construction costs in the hope that this would expand the nation’s capacity to build more homes.

Breunig said both sides were largely offering policies that would increase demand in the property market, and was especially critical of the Coalition tax deduction.

“It is purely about demand and it’s extremely complex, at a time when the housing market is crying out for supply,” he said.

Grattan Institute chief Aruna Sathanapally said the Labor package offset the incentives for new buyers with the measures to add to supply, saying this should support more development.

UNSW professor Hal Pawson, an expert on housing affordability, also backed the Labor policy for addressing the decline in home ownership. “I think it’s really quite a big move,” he said.

But economist Steven Hamilton, an assistant professor of economics at The George Washington University in Washington, faulted both parties for not identifying savings.

“Both parties are putting a rocket under demand and thus house prices,” he said.

“In the extreme, Labor’s policy runs the risk of stoking a sub-prime crisis. And the Coalition’s policy blows a permanent hole in the income tax system and is extremely regressive.

“Neither offers the really bold incentives needed to get state governments to pressure local governments to expand supply, which is the only silver bullet we have.”

Peter Tulip, a former Reserve Bank economist who is the chief economist at the Centre for Independent Studies, said the Coalition’s mortgage deduction would probably drive up prices.

“Because the price of existing houses is competitive with new houses, the price of existing houses will rise [also]. It’s a competitive market, so if you increase the price of new cars, the price of used cars will also increase.”

Tulip also cast doubt on Labor’s plan to guarantee mortgages, saying such a policy transferred risk to taxpayers.

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