The housing affordability crisis

The last 18 months has been unprecedented in a number of ways, but the rebound in the housing market has taken most by surprise. 

There are number of reasons why the market has rebounded including low interest rates, some relaxation in lending restrictions and low supply in some areas.

The outcome is that many younger people are being priced out of the market, which isn’t a new problem but one that’s intensified in recent months and one that’s likely to gain increasing media attention as we approach the next federal election.

The intent here is to summarise some recent government initiatives that are intended to assist young people enter the housing market and also some commentary about what might happen if this or future governments determine that more intervention is needed (with reference to a recent initiative from the New Zealand government).

Firstly, there were some announcements in the most recent federal budget dealing directly with housing affordability for younger people:

The First Home Loan Deposit Scheme (New Homes) 
The FHLDS is a government guarantee offered to first home buyers who have at least a 5% deposit to purchase (off the plan) or build a home.  Under the scheme the government provides the lender with a guarantee of up to 15% of the loan value, which avoids the lender applying Lenders Mortgage Insurance on the loan.
In the budget the government announced a further 10,000 places to be available to eligible first home buyers.  Buyers need to meet various other criteria to be eligible.

Family Home Guarantee
The FHG is a loan guarantee provided by the government and is specific to single parents who have a deposit of at least 2%.  Applicants don’t have to be first home buyers.
A further 10,000 guarantees were announced in the recent federal budget.

First Home Super Saver Scheme
The FHSSS permits applicants to voluntarily contribute and withdraw up to $30,000 from superannuation to put towards their first home.  The advantage of the scheme is that the tax rate on earnings within superannuation (15%) is likely to be less than the marginal tax rate applicable to savings outside superannuation.
The government announced in the budget that the withdrawals available under the scheme will be increased to $50,000 (from 1 July 2022).

Other initiatives
The above measures are additional to various schemes at state level for first home buyers including grants and stamp duty concessions (these vary by state).

The reasoning behind the above initiatives:
Helping first home buyers and single parents enter the market is an obvious priority, but the government is also hoping to support the residential construction industry by targeting new homes in some of the schemes.

The question is - will it work?  Time needs to be given for the above initiatives to have an impact but the effect of previous similar initiatives has generally been modest.  While they provide some assistance to help those who need financial assistance to buy a home, they do little to address the fundamental issue of housing affordability. 

It’s likely that this will become an even hotter topic in the media as we head towards the next federal election.

Is New Zealand a guide to what might happen here?
House prices in New Zealand are up by over 25% since the beginning of 2020.  As the RBA has done in the past, their central bank (RBNZ) has implemented some constraints on the banks’ capacity to lend in an attempt to constrain demand, however the impact has been relatively minimal.

In late March 2021, the NZ government made the policy decision to remove the tax deductibility for interest payments on residential housing. 
The laws will apply to residential investment properties acquired after 27 March 2021, although the deductibility for properties acquired prior to that date will be gradually phased out over the next 4 years.

The intent of the policy is clear.  Firstly, the government is counting on investors deciding against buying property (thus reducing overall demand as investors count for around 25% of housing loans in NZ).  Secondly, the government hopes that existing investors will sell up thus increasing supply.

It’s too early to tell whether this will be successful or not.  Supporters suggest that it will lower prices and make housing more affordable for all.  Opponents predict that it will damage the NZ economy by reducing consumer confidence (through lower housing prices) and thus reduce spending.

Will the same happen in Australia?
At this stage we consider it unlikely.  The opposition went into the most recent federal election with a proposal that would have restricted deductibility on investment properties, but this was one of the policies blamed for their defeat. 

So what will the Australian government (current and future) do to improve housing affordability?  
Aside from the initiatives already in the market, which aren’t expected to have a material impact, it’s worth noting that there was one other budget initiative that could be beneficial.

Specifically, the government announced that the downsizer contribution scheme will be extended from 1 July 2022 to those aged 60 or older (currently 65 or over).

The scheme permits those who meet the eligibility criteria to contribute up to $300,000 each from the sale of their home ($600,000 as a couple) to their superannuation. 

The idea is to encourage those who are close to or who are in retirement to downsize their homes.

However, while this may be of some benefit it’s unlikely to have a significant impact on housing affordability for younger buyers. 

What else might happen?
Often governments allow market forces to dictate the housing market.  If increased house prices lead to increased spending and thus inflation then interest rates might rise to combat that, which might constrain demand for housing. 

However, in the wake of COVID the RBA has indicated that they intend to leave rates on hold for the foreseeable future and it’s unlikely that strategy will change unless there’s a significant and rapid rise in inflation.

So, the more likely outcome is further constraints on lending, which were imposed after the Royal Commission in 2018/19, but were then relaxed during COVID to encourage banks to lend to stimulate economic activity.
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It’s probable that this will be extent of any intervention in the market in the short term, but the housing experiment in NZ will be watched closely to see what impact it has.

This discussion is general in nature and does not include any recommendations of any sort. If you would like more information or wish to consider any of the above in relation to your personal circumstances, then please contact our office to make an appointment with one of our advisers. ​

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