Time to scrap the first home buyers grant

Trying to help your kids when they go to buy a home? It looks like the scheme will have you chasing your tail.

While it used to take around five years to save a deposit, it now takes about seven years.

Do first homebuyer grants work?

The short answer is no.

In fact, we would all be better off in the long run if they had never been invented.

Homebuyer incentives simply push all prices higher.

So, if you are bending over backwards trying to qualify for that grant, take a moment. If you are pushing your son or daughter to do the same, you might be pushing the wrong way.

There has always been debate around the merit of first homebuyer incentives but now we have it in black and white from the Productivity Commission which issued a powerful report this week.

“Assisting home buyers can make housing less affordable … it is not typically home buyers who benefit from the assistance, it is the sellers who receive a higher sales price,” the report reads.

But in coming to its inevitable -and entirely logical – overall conclusion that home loan grants don‘t help home buyers, the report offers some very useful investor insights that we are never going to get from real estate agent economists or anyone else knee-deep in the business.

One thing the report makes clear is that, for all the talk of an affordability crisis in Australia, we have not really experienced such conditions until recent months.

Affordability barely budged for two decades – thanks largely to lower interest rates. That period of low rates may have created a false sense of security while we did not see enough homes built over the same period. The end result is we now don’t have enough housing stock – we have 411 dwellings for every 1000 people, one of the lowest rates in the OECD.

About two thirds of the overall population still own their own home but renting is becoming more common and much more costly. That’s largely because the deposit you must accumulate to buy a house has really lifted.

Just to look at that single issue: Two decades ago in 2002 the average Australian buying the average home needed less than $50,000. Today they need around $120,000. And remember, wages have not risen in line with these increases at all.

No wonder the Productivity Commission notes: “The main barrier preventing many prospective homeowners from purchasing a house is saving for a deposit.”

“The sharpest falls in home ownership have been among middle income households,” it says.

The report also reveals a key features of the market that should not be missed – home ownership is dropping fastest among the very group that should be coming into the market right now.

The share of younger households owning their own home fell from nearly half in the 1990s to not much more than a third by 2022.

On top of that, it takes longer and longer to save for a house – it used to take around five years and it now takes around seven years.

The crux of the situation is this – prospective home buyers may have the income to afford mortgage repayments, until recently at any rate, but they struggle to get a deposit together. (Whether the government’s deposit assistance schemes colour the numbers here is not clear just yet). As the report explains: “There is limited evidence of ‘catching up’ in later life.”

In other words, if you don’t buy that first home when you are younger you are probably dreaming if you think you will buy it when you are over 35 (the cut off age for being young according to the boffins at the Australian Bureau of Statistics).

If home ownership is declining … and there is a genuine shortage of housing stock, guess what?

The rental market goes crazy. As investors, we already know that vacancy rates are hovering around 1 per cent and we know that rents are going up at the fastest pace we have seen in a generation.

Turning its analytical gaze on this sectors the Productivity Commission deals with what it calls “private rental unaffordability’’ – the pointy end of the crisis.

Investors control the housing market – 85 per cent of residential property for rent is held by everyday Australians who are often taking advantage of negative gearing tax breaks.

About one in four people rent. And more Australians are renting, for more of their lives.

Just like home affordability – the numbers on renting remained little changed for years – the median proportion of income spent on rent – at 25 per cent – remained unchanged since around 2000.

But now we have rents rising rapidly. If the acceleration in rentals continues for much longer then the days when you paid a quarter of your salary on rent will be looked back upon as easy times.

The Productivity Commission even references the “bidding wars on properties for lease where people desperate to secure somewhere to live are trying to outprice each other”.

If you want to see hard evidence of these bidding wars take a look at the queues outside houses for rent in any suburb just now.

Some investors may be taking heart from higher rents even if there are falling prices.

Some Sydney suburbs recorded rental rises of more than 20 per cent over the last year.

But the report shows a market where the underlying signals are not reassuring – home buyers are the bedrock of the market, if they can’t get into the market then it could be a long time before prices start rising again.

Using this extraordinary data the Productivity Commission offers a few provocative suggestions. It says home loan grants should be phased out in the coming years and the freed up money should be targeted towards assisting the homeless along with boosting rental assistance. It’s certainly upside down that it seems easier to get a first homebuyer grant than to get homeless assistance – that service had 114,000 requests rejected in the 12 months to June 30.

Yet homebuyer grants make the buying of property more expensive than ever. Certainly, if you invest in residential property with a view to helping your kids in the future when they go to buy a home – it looks like homebuyer grants have you doing the financial equivalent of chasing your tail.