Thawing the first-home market

The Federal Government may need to dust off some blueprints to help first-home buyers.

Summary: The current focus on housing affordability and the challenges for first-home buyers means the government may need to make some policy changes. These changes could involve the reintroduction of first-home owners grants and the removal of negative gearing on property.
Key take-out: First-home buyer numbers have been tapering off, and they're now at a low point.

Key beneficiaries: General investors. Category: Property.

There has been more talk than normal about property prices, first-home buyers and government policy.

The concern that has prompted this continues to be the ongoing difficulty of first-home buyers to get into the market, an issue highlighted by figures showing that first-home buyers make up only 12.5% of the new mortgage market. This is well below the long-run average of 20%, and while more than 1 million potential buyers have property purchasing ambitions, they are currently left on the outer.

There is a broad spectrum of comment that the Federal Government has to do something, coming from people as varied as social advocates to banking analysts. The question is, what should the Government do?

A new boost?

An interesting element to the graph of first-home buyers (above) is the spike after 2008, where the number of first-home buyers increased to make up more than 30% of the market.

What caused this? During that time government policy allowed grants (actually an extension of grants in the form of a ‘First-Home Owners Boost’) for first-home buyers, offering an extra $7,000 for the purchase of existing homes. This was doubled to $14,000 during 2008 and 2009 to support new homebuyers through the global financial crisis. In addition to the $7,000 first home owner grant, first-home buyers purchasing a newly constructed home received an additional $14,000, and other bonuses also were available.

This seemed to have a positive impact on the number of first-home buyers entering the market – although many commentators argued that the various grants/boosts for first-home owners only served to push up house prices further than the value of the grants, actually leaving first-home buyers worse off.

It is interesting to think about what might happen, from a property investor’s perspective, if the Federal Government were to implement a scheme that included some sort of lump sum to help first-home buyers into the market.

The financial carnage of the GFC tended to hide any price effect of the ‘boost’. However, it would be reasonable to assume that another scheme that saw a lump sum paid to first-home buyers would see demand, and therefore prices, increase. This would particularly be the case for slightly cheaper-than-average properties – those that fall below the median price of an area.

While I think a scheme of this nature is not necessarily likely, property investors who own this style of property might have to think about selling if it were to come about. A combination of generally high property prices (compared to average incomes), very low interest rates and a Government boost might make it time to take profits.

Negative gearing

Another policy response that has received some discussion is the possible winding back or abolishing of negative gearing. Negative gearing allows investors who make a loss on their property (where expenses exceed income) to offset that loss against other income that they earn.

As a simple example, a person who owns an average $450,000 house in Brisbane can rent that out for $390 a week (3 bedroom house, median rent, RTA data). This is an income of $20,280 a year. Costs for the property might include $22,000 in interest costs, $3,000 in rates/water charges, $1,500 for agent fees and $2,000 for repairs. This represents a total loss of $8,220 a year.

A person earning $200,000 a year can use this loss to reduce their taxable income to $191,780 – a tax saving of around $3,820 a year.

A tax saving of $3,820 is substantial, and something that makes property investing attractive for many investors. (A recent report by the Grattan Institute suggested that the combined effects of negative gearing and the 50% discount on capital gains for assets held for more than 12 months was worth just over $4,500 a year for property investors – suggesting that these calculations are reasonable).

So what if negative gearing were abolished? The potential outcome to help first-home buyers would be this: housing becomes less attractive to investors; therefore there are fewer in the market or they are not prepared to pay as much for properties; therefore properties prices fall and it becomes easier for first-home buyers to enter the market.

A key part of any debate around negative gearing comes from the time in the mid 1980s when it was effectively abolished – with many people claiming that this led to an unsustainable increase in rents that eventually saw the policy reversed. An increasing number of commentators, backed by analysis of data, suggest that the surge in rental prices was concentrated in Perth and Sydney, and came on the back of very low vacancy rates even before the change to negative gearing rules.

Be this as it may, any targeted strategy (in this case the removal of negative gearing) to decrease property prices is likely to be politically difficult. Even if negative gearing rules were allowed to be kept (grandfathered) for existing investment properties, the implementation of a Government policy that looked to reduce house prices seems a long shot – particularly given the impact that falling house prices potentially has on consumer confidence and spending.


Pre-empting government policy is not easy, but the current focus on housing affordability and the challenges for first-home buyers means the government could be forced to make some policy changes.

Getting rid of negative gearing seems a long shot, so policy that focusses on helping first-home savers into the market with incentives or lump sums seems a possibility. For property investors, this might mean price increases in the sort of houses first-home buyers will look to.

Scott Francis is a personal finance commentator, and previously worked as an independent financial advisor.

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