2001 cabinet papers: Warning of dangers in cash aid for homeowners

John Howard and Peter Costello have cautioned governments about introducing new cash incentives for new homeowners, despite doubling grants under the First Home Owners Scheme in 2001.

On March 19, 2001, cabinet increased the grant available for first home buyers who purchased a previously unoccupied home or built a new home from $7000 to $14,000. Picture: Nikki Short

John Howard and Peter Costello have cautioned governments about introducing new cash incentives for new homeowners, which could have an inflationary impact on house prices, despite doubling grants under the First Home Owners Scheme in 2001.

On March 19, 2001, cabinet increased the grant available for first home buyers who purchased a previously unoccupied home or built a new home from $7000 to $14,000. First home buyers who purchased an existing home remained eligible for $7000.

Cabinet also noted that state and territory governments would be encouraged “to consider waiving at least part of the stamp duty they levy” on new house purchases while banks and lending institutions would be asked to favourably consider the additional funds as part of borrowing applications.

The measure was introduced to provide an “economic stimulus” to the housing sector given a lot of new housing acquisitions had been brought forward prior to the introduction of the GST.

The additional grant was a temporary measure that was to apply until December 31, 2001.

But, two decades on, the former prime minister and Treasurer are wary about incentives designed to assist homeowners that may result in increased house prices.

“The bringing forward of all that housing activity, which three months later produced a slump, was a reaction to the GST and with those sorts of things, which are events specific and not long term, then they are not things that do permanent damage to the economy,” Mr Howard said.

“Home ownership is at the core of middle-class stability and it is very important to Australia. At various stages in my public life, I supported first home ownership incentives. But there are no magic solutions to housing affordability.”

Mr Costello explained that the original grant was “a compensation mechanism” for the introduction of the GST, which taxed building materials that had previously been exempt from wholesale sales tax.

“Did the $14,000 stimulate some more building? Maybe. But the problem with all of these incentives you have got to remember is that they do help some people but they also push up prices,” the former treasurer acknowledged.