Housing tax credit: the Australian experience

There has been a big fuss over the US housing tax credit, now that the sun is about to set on the scheme.

The $8,000 tax credit, which will expire at the end of November, has boosted home sales in recent months.

The Housing Tax Credit: Maintaining a Market on the Brink

Make no mistake, similar to the cash for clunkers program in August, the housing market has been kept active with a cocktail of government programs. Like most others, we agree that the outlook has been getting better and some progress is being made, but there is still a lot of work to be done. And, even though I generally oppose spending taxpayer money, now is no time to pull the plug on the lifelines.

Nevertheless, the tax credit is not dead in the water, as legislators are indeed mulling an extension and, perhaps, even an expansion to include buyers making more than $75,000 per year and people who are not first time buyers.

unless inventory is kept under control there will continue to be downward pressure on prices. As it stands, even with the tax credit sales are barely outrunning additional supply. In fact, the last reading on inventories from August showed that August inventory of existing homes is essentially flat with January

In the end, without the tax credit extension and/or other programs to keep housing on its feet, the pace of supply of foreclosed homes soon to land on the market seriously risks surpassing the rate of demand and causing another drop in prices.

Senate Moving to Expand $8000 First-Time Homebuyer Credit to All Homebuyers

A group of Senators, including Senate Banking Committee Chairman Chris Dodd, are moving to extend the $8,000 first-time homebuyers tax credit and extend it to all homebuyers.

Sen. Johnny Isakson (R-GA) who had previously owned a real estate company before being elected as Georgia’s junior Senator, told the Senate banking committee on Wednesday that the real estate market would likely remain depresses for five years or longer if the government doesn’t step in to encourage slow home sales and make additional moves to decrease unemployment.

Isakson recommended to the committee that Congress extends and expands the credit by increasing the eligibility limit to $300,000 to bring more buyers into the housing market.

Chairman Dodd is hoping to stimulate homebuyers that are “moving on up” by encouraging people to upgrade from their first-home to a more expensive one. Dodd said, with first-timers, “You’re living on a futon in a…bare bones deal, because you — you got that house…and you’re trying to make ends meet,” Dodd continued, “It’s that move-up market, where you start to get what I call sort of a ripple effect, that is always so important in housing.”

The Australian government has for many years noted that housing affordability is at the high end of international norms. Back in 2000, ostensibly to offset the introduction of a new goods and services tax, it began offering First Home Buyers a grant (see, e.g., this). A free chicken in every pot sort of political fare.

It proved such a great idea, politically, ever since then the "scheme" has been tinkered with, increasing and decreasing it as political, and sometimes (coincidentally) economic, tides turned. The most recent Federal government had a "Boost" scheme that doubled most anything seen before.

And what has been the result there? Are the taxpayers better off? Has it actually increased the lot of the wannabee buyers? It is a nuanced answer, but it appears the main effect has been to simply increase housing prices, putting more money into the hands of those with stuff to sell, not really putting more owned shelter over people's heads.

Farewell and good riddance to the first home owners' boost

A friend asked me the other night whether he should wait until after the first home owners' boost expires to buy his first property. I didn't think twice. "Yes," I replied.

Usually, I’m a bit more circumspect with my financial advice, but on this point, the evidence is clear.

Wannabe first home buyers should be sitting back and breathing a huge collective sigh of relief when the Rudd government’s boost begins to be phased out two weeks from today.

You see, it was designed with their baby boomer parents’ interests at hearts, not theirs.

Let me explain.

You should really read her explanation, but her conclusion is,

Boosting the grant was a very deliberate ploy to lure more first home buyers into the market, using government money to pay more than they otherwise would have for a house and helping to stave off any fall in house prices, which would have spooked existing owners (who make up about two thirds of the population). [And constitute a huge block of constituent voting power.]

And it worked, spectacularly.

Trouble for new home owners in 2010

the boost may have created a dangerous market bubble for first homeowners, TD Securities economist Annette Beacher said.

"It's very politically welcome to help people into their first home," Ms Beacher said.

"The boost has obviously worked, because we've seen a pick up in housing finance, a pick up building approvals.

"From an economic perspective it's done what it meant to do."

But she said that first home buyers were actually worse off because the boost had inflated house prices.

"The boost has been capitalised into the price, the average home loan for a first home buyer is now about $23,000 more than last year," Ms Beacher said.

"There's also a strong possibility that there will not be any aspiring first home owners left by next year.

"So all this has done is brought forward building activity and there's a risk of considerable weakness to (building activity) on the other side.

Time to rethink the First Home Owners Grant

Most importantly, we must get the balance between home purchase and rental assistance right. Housing stress is overwhelmingly concentrated in the private rental market, yet our policy settings have for too long been skewed towards home purchasers, owners and investors through home purchase assistance, Capital Gains Tax concessions and Negative Gearing.

The Government has taken some decisive action to improve the policy balance, with a massive investment in affordable rental housing through its $6.2 billion 'social housing' stimulus funding and more than $600 million for the National Rental Affordability Scheme.

Substantial as this recent investment is, there is no denying the extent of housing need in Australia. There are 180,000 people on public housing waiting lists (with many more in need, but ineligible) and 100,000 people are homeless on any given night. Sadly, these figures are only going to increase as the economic downturn takes its toll.

Continuing substantial investment in affordable rental housing and increased financial assistance will be needed over the coming years to relieve the pressure on struggling renters.

Targeted home purchase assistance programs have a role to play in assisting low to moderate income purchasers into the market (and keeping them there where possible), but should receive a smaller proportion of the housing pie than assistance to struggling renters.

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And this supports the Aussie experience that all that tax credit did was raise prices for the sellers, not make it more affordable for the buyers:

Goldman says US gov’t boosted home prices by 5%