Affordability plans won't dent house prices

It has taken a long time but state and federal governments are finally in agreement: our housing affordability problem needs to be addressed. Somewhat counterintuitively, however, their proposals are likely to push prices higher, creating a bonanza for existing home owners and investors.

Victorian Government

The Victorian Government announced a plan earlier this month to abolish stamp duty for first home buyers on properties worth less than $600,000. Those purchasing a property valued been $600,000 and $750,000 will also be eligible for a reduced concession.

Stamp duty is an incredibly inefficient tax that effectively punishes people for moving house, which undermines labour mobility and leads to a less than efficient use of Australia's housing stock. It's one of the major reasons, for example, why older Australians are reluctant to downsize despite living in houses that are often too large for a couple or single occupant.

Any policy that removes stamp duty, even partially, should be encouraged. What's interesting about the Victorian Government's plan is that the removal of stamp duty for first-home buyers will likely become capitalised into the price, since it increases their ability to pay. In other words, the value of the stamp duty will be transferred from the Victorian Government to the vendor.

Unfortunately for investors, the Victorian Government's new reforms are not without a catch. They plan to remove off-the-plan stamp duty concessions on investment properties. The concessions will still apply for those who intend to live in the property or who are eligible for the first-home buyers' stamp duty concession.

The Victorian Government also plans on introducing a Vacant Residential Property Tax that will tax those properties that have been left vacant by investors. While savvy investors will seek renters to maximise their return on investment, estimates provided by Prosper Australia indicate that the rental vacancy rate is around 6.7 per cent in the Melbourne CBD and 7.6 per cent in the suburb of Carlton.

The tax will be levied at 1 per cent of the capital improved value of the taxable property. For example, if a vacant property has improved in value by $200,000 then the tax will equal $2000.

The removal of stamp duty for first-home buyers will obviously be beneficial to existing home owners and investors. The removal of stamp duty concessions on off-the-plan investment properties will be detrimental, but many of these apartment buildings have already reached the construction stage. Meanwhile, a vacant property tax won't affect smart investors and will most likely affect foreign investors who are using Australian property as a safe haven.

Federal Government

The Federal Government has an unfortunate habit of floating policy ideas and then back-tracking soon after. So I'm a bit reluctant to speculate on any housing affordability policies that we might hear about prior to the Federal budget in May.

Some of these proposals include the Federal Government partnering with first-home buyers to purchase property via shared equity, potential bans on foreign investors owning more than half the apartments in a development, and measures designed to encourage pensioners to downsize by offering additional superannuation concessions.

Let's focus on the ‘shared equity' proposal. It basically boils down to the following: imagine you, as a first-home buyer, want to purchase a property for $600,000. The Government or private lender would cover, say, 25 per cent of the value which means that you only need to stump up $450,000.

It's a policy that would dramatically increase the purchasing power of first-home buyers. Past policies, including the first-home owners' grant and the subsequent boost announced during the global financial crisis, provides a pretty good indication of what this means for the broader market. First-home buyers will enter the market, improving home ownership among younger Australians, but it will also push house prices higher.

In a shared equity model, the Federal Government or a private lender would then claim 25 per cent of the selling price at a later date.

Such a policy would increase the competition against property investors. Suddenly first-home buyers, normally at a clear disadvantage, have the backing of the Federal Government or a private lender that allows them to spend 25 per cent more than they otherwise could. In some cases this may be sufficient to offset the purchasing power of investors who benefit from tax concessions such as negative gearing and the capital gains tax discount.

Investors looking to enter the market may find conditions more challenging; those already in the market would be licking their lips. Government subsidies make it easier to generate capital gains.

But the policy itself also creates other opportunities for investors. If Treasurer Scott Morrison pursues a privately-financed shared equity arrangement then investors may be able to buy indirectly into the housing market.

A bank or other financial institution could bundle and securitise a thousand of these shared equity agreements and float them on the stock exchange, allowing investors to buy shares in the underlying assets. It's actually a cheap and easy way to get exposure to the housing market; certainly more liquid than buying a property outright.

It does run the risk of adding further speculation to a property sector that is already dominated by investors. Would this really be beneficial for financial stability?

The Victorian Government has also proposed a similar $50 million pilot program, called ‘HomesVic', which would give about 400 people the chance to co-purchase a dwelling. This program targets couples earning up to $95,000 and singles earning up to $75,000.

There are other affordability measures and, as we approach the Federal budget in May, it will become clearer what these policies entail. What is clear to me, however, is that neither the Federal Government nor the Victorian Government are interested in letting house prices fall. Long-term that isn't a path towards improved affordability, but in the meantime it presents a pretty clear opportunity for investors to make a little cash.

Investors should, nevertheless, be aware of other issues. A big one right now surrounds the Reserve Bank and the Australian Prudential Regulation Authority, which have both become increasingly vocal on housing affordability.

A decision to tighten macroprudential policies could more than offset any beneficial policies arising from the Victoria or Federal governments.