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Are Government Property Incentives Working? - August 2020

By Guest Blogger, Peter Koulizos, property lecturer and author

 www.thepropertyprofessor.com.au 

There are many local, state and federal government incentives available at the moment which are directed towards the home buyer, especially first home buyers of new homes. These incentives have been put in place for two main reasons. Firstly, if it is targeted at new homes or renovations, it stimulates activity in the building and construction industry which for many states and territories is one of the largest sectors so far as their economy is concerned. Secondly, it stimulates general economic activity as people who are building or renovating will often spend money on furnishing the home with white goods, floor coverings, furniture, etc.

There are too many incentives around the country to examine in this article but there are a few general questions that should be asked.

Are the government incentives for renovation too narrow and restrictive?

1. The HomeBuilder grant which allows for renovations is defined as:

“HomeBuilder will provide eligible owner-occupiers (including first home buyers) with a grant of $25,000 to build a new home or substantially renovate an existing home where the contract is signed between 4 June 2020 and 31 December 2020. Construction must commence within three months of the contract date.”

In regards to renovations, the eligibility criteria states”

“substantially renovate your existing home as a principal place of residence, where the renovation contract is between $150,000 and $750,000, and where the value of your existing property (house and land) does not exceed $1.5 million (pre-renovation); and construction must commence on or after 4 June and within three months of the contract date.”

Firstly, the federal government is to be commended for this initiative as a renovation grant has never been in place before as the focus has mainly been on the building of new houses. However, I have two criticisms of this grant. It doesn’t allow the person that wants to do less substantial renovations to access this money as you need to spend at least $150,000 before you become eligible. Secondly, the timeline is too tight. To have plans drawn up, gain planning and building approval and then sign a contract based on the approved plans will more often than not take more than just a few months.

2.  Do the first home buyer incentives really help first home buyer or just fill up developers pockets?

There is no doubt that the first home buyer incentives certainly assist people who are looking to buy or build their first home. One of the very difficult aspects of buying your first home is saving for the deposit. Paying the mortgage is relatively easy compared to saving for a deposit as interest rates are so low that the interest rate component of the mortgage repayment is often lower than the rent they would be paying.

The $25,000 on offer from the federal government, state government grants and stamp duty concessions all help first home buyers buy or build a new home. As these incentives generate more activity in the property development industry, it also fills the pockets of builders, property developers, tradespeople, conveyancers, town planners, building designers, architects, etc, etc.

3.  Do these incentives result in unintended consequences?

The simple answer is “Yes”. With extra demand for property, especially new property and the lag in time to supply the new property, invariably this forces prices of new homes to go up. This effect seems to be counter-intuitive as the governments are offering incentives to help people buy a new home but one of the results of this is that it forces prices of new homes up which makes it harder for new home buyers. The negative effect of the price increase is not as great as the positive effect of the grants but basic economics states that if you increase demand, price will go up.

One measure that would limit the price increase in new homes is to make the incentive available for existing homes. New homes only add 2% to the existing house housing stock so if you focus all the incentives on this very small component of the housing sector, of course it will force property prices to increase. However, if the demand was spread across the whole housing sector, it would ease pressure on price increases for new homes.

Another unintended consequence of new home incentives is that it encourages buyers into areas/properties where there is a high concentration of cheap new homes. This often means they buy small apartments in the city or courtyard homes a long way from the city. Even though this allows many people to get out of the rental market and into the home ownership market which is a great move, buying a new apartment or house a long way from the city is not the best way to progress to a second bigger or better home. Buying new property, whether it is large or small, close to or far away from the city, is detrimental to home owners moving up the property ladder. New property, like new cars, depreciate in value very quickly and it is difficult to trade up in the property market when the value of your property is going down, or at the very least not increasing at the same rate as established property.

This is another reason to make the home buyer incentives available for established homes. This would give people a wider range of housing to choose from and also encourage them to move into relatively older and cheaper properties, which need some improvement, in our run down inner and middle ring suburbs, thus improving not only their homes but also the slowly gentrifying or renewing the whole suburb. It is a win/win for home owners and government, especially local councils.

4.  What would happen to property demand if these grants were not available?

If these grants were not available, not only would it decrease demand for property which would force property prices to decrease but there would not be any great stimulus in the economy. What the economy needs now during COVID-19 and other economic downturns is stimulus. This is best done by governments spending money, especially on initiatives that creates employment such as the construction of infrastructure and by providing money to the public which encourages them to spend and in turn creates more employment.

 

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