Dutton promises tax-deductible mortgage interest repayments

Opposition Leader Peter Dutton has unveiled a major new policy to allow some first home buyers to deduct interest payments from their incomes, in an incentive worth as much as $12,000 a year to each buyer.

Placing housing at the centre of his formal campaign launch on Sunday, Dutton said young Australians would be able to claim the tax deduction on newly-built homes and gain a benefit worth thousands of dollars each year.

Peter Dutton reveals the policy in the Labor-held seat of Werriwa.Credit: Max Mason-Hubers

The bold pledge to people locked out of the housing market will counter Labor’s plan to allow most first home buyers to enter the housing market with a 5 per cent deposit.

The two centrepiece election promises reflect the importance of the housing crisis to the election, with the parties revealing the pledges at duelling campaign launches with Anthony Albanese in the must-win city of Perth and Dutton in the mortgage-belt seat of Werriwa in western Sydney.

The Coalition policy is expected to cost $1.25 billion over four years in foregone tax revenue by allowing the tax deductions for thousands of home buyers, in a key assumption that it would be taken up by about 30,000 buyers each year.

It would be applicable only to the first $650,000 of a mortgage for the first five years of repayments. It will be limited to single people earning up to $175,000 a year and couples earning $250,000. It has been limited to newly built homes, so the Coalition can claim the move would encourage the building of new homes to avoid creating more demand for limited supply. But experts said prices might still rise.

As an example, the Coalition said a mechanic earning $132,000, who borrowed $700,000 at 6.1 per cent to buy a property in Sydney, would be able to deduct mortgage interest costs on the first $650,000 of the loan of about $60,000 over the five years, or about $12,000 a year.

“I will be a prime minister who restores the dream of home ownership,” Dutton said in a set piece speech in western Sydney.

“Homes for young Australians.”

Opposition housing spokesman Michael Sukkar and his colleagues explored the prospect of a bigger mortgage deduction scheme earlier in the term. Examples of the policy exist in the United States, but the Coalition decided against widening the scope because of the exorbitant cost.

The opposition calculates the tax deductibility scheme would cost $1.25 billion over the next four years, according to a Parliamentary Budget Office analysis, but this figure is difficult to estimate because the Coalition concedes it does not know how many people would take up the offer.

While the tax deduction would be worth more than $12,000 a year to some buyers, most would receive less than that. A couple earning $100,000 each, for instance, would get a benefit of about $11,000 a year if they claimed for a $650,000 mortgage.

As Dutton’s polling numbers have slid, the opposition has decided to reach for expensive and bold policies that were not locked in at the start of the campaign. These include the $1200 cost-of-living tax offset to be announced by Dutton today and the mortgage announcement.

Peter Dutton with wife Kirilly and their children at the campaign launch.Credit: Max Mason-Hubers

Labor’s housing plan would dramatically expand the current 5 per cent deposit guarantee scheme first introduced by the Morrison government, which is currently limited to 35,000 people a year and available only to singles earning under $125,000 a year or couples on a combined income of $200,000.

Under Labor’s policy, which would take effect from the beginning of next year, a first-home buyer will be able to buy a home at the median national house price of $820,000 with a deposit of $41,000. The government would guarantee 15 per cent of a property’s value, allowing first-home buyers to enter the market with a 5 per cent deposit.

Labor will also create a $10 billion plan to build 100,000 new homes for first home buyers, comprising $2 billion in grants and $8 billion in zero-interest loans or equity investments with states and housing developers.

Peter Tulip, a former Reserve Bank economist who is the chief economist at the Centre for Independent Studies, said the Coalition’s mortgage deduction was the most significant of Sunday’s policy reveals.

The change effectively allows a first home buyer of a newly constructed home to negatively gear their own property, Tulip said, a practice currently allowed only for investments.

In most countries where mortgage deductibility exists, users of the scheme pay tax on any capital gain made on the sale of the home but in Australia, this tax only applies to investment properties.

Even though it was limited to new builds, Tulip argued the policy would probably drive up prices.

“It is a bad idea,” Tulip said, calling for action to loosen town planning laws to build more homes.

“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.

Independent economist Saul Eslake said the Coalition plan would both drive up house prices and force younger Australians to take on larger mortgages.

He said while driving up demand, the policy did very little to increase the supply of housing across the country, while imposing a huge cost on taxpayers through the budget. “I didn’t think it was possible, but this policy is a rival with the Western Australian GST deal as the worst policy so far this century,” he said.

Eslake said Labor’s first home buyer policy would also put upward pressure on house prices, but not to the same extent as the Coalition’s plan. “At least there is some supply with the Labor plan,” he said.

Housing Minister Clare O’Neil said on ABC’s Insiders that Labor’s pledge would not have a significant impact on prices, but she did not deny it would have some effect.

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