The budget home buyer mire

When the Victorian government delivers its first budget today, it will contain a tasty morsel for young first-home buyers – a 20 per cent stamp duty concession worth around $5,800 on the purchase of a home at the median house price of $565,000.

Voters love this kind of economic lunacy – a $5,800 benefit that mortgage brokers can type into their spreadsheets to ratchet up the amount a young person can borrow.

The only saving grace for the Baillieu government is that with Melbourne house prices falling, the benefit may end up in borrowers' pockets for a change, rather than flowing as interest payments to buyers of Australian bank debt.

Wayne Swan will no doubt wish he could provide a similar treat to younger voters from Canberra. Treasury still has to relinquish $7,000 of GST revenue per first home sale under the standard First Home Owners Scheme set up by the Howard government – a 'temporary' scheme set up in 2000 to help the building industry adjust to the introduction of the GST.

Saul Eslake and Steve Keen, economists who rarely see eye-to-eye, both say they'd be horrified at the thought of increasing the federal grant, and would prefer to see it scrapped.

And this budget would be the perfect time to do so.

Both RP Data and ABS figures released in the past week show house prices tumbling, or as young buyers might say, affordability increasing. Put that alongside the urgent need for fiscal restraint in this year's budget, and it would seem a no-brainer to erase the FHOS at the very least.

But it can't happen. While scrapping the FHOS would save $690 million in the federal budget, it would generate a wave of negative headlines that would add to the Gillard government's pain over the carbon tax, illegal boat arrivals and the corner it has painted itself into by promising to get the budget back into surplus by 2012-13.

And so we are stuck with consumption tax revenue being recycled into the housing market. It's dead money, and think what it could buy instead – Infrastructure Australia currently operates on an annual budget of $5 million and offers the government excellent advice on how to increase national productivity at the least cost. I'm sure they could use a few million more of the money being recycled into housing for no productivity gain whatsoever.

Another bug-bear for many economists, Eslake and Keen included, is negative gearing of property which costs the government between $2 and $3 billion in lost revenue a year and fails miserably to meet its objective of increasing housing supply.

Eslake wrote recently in the Fairfax papers: "It's actually quite difficult to think of anything that would do more to improve affordability conditions for would-be home buyers than the abolition of negative gearing. It would certainly do more than continuing to give large amounts of cash to would-be first-time home buyers through grants or stamp duty concessions, which historically have served only to increase the prices of existing dwellings and ended up in the pockets of vendors."

The only way to rid our economy of these fiscal and productivity drags is for a bipartisan admission that they don't do any good. And that's certainly not going to happen in the current era of tooth-and-nail opposition.

Instead, if next week's budget speeches mention first home buyers at all, it will be to trumpet rising affordability - which in some way will be linked to the 'booming economy' – lest young Australians forget they've never had it so good.

But Wayne Swan will know that in the year ahead 'affordability' will rise too much for comfort – that is to say, a large slice of Labor supporters will watch the value of their homes fall and some of the blame for that will be sheeted home to the effect 'big spending' Labor has on interest rates.

Home borrowing by investors and owner-occupiers, in aggregate, continues to slump (see: chart below), and the negative wealth effect of that slump will be significant. Mortgage holders will be caught between falling nominal house prices and rising inflation and interest rates.



Moreover, banks will be aware that, in real terms, system growth in the home lending market is grinding towards zero. So a secondary wealth effect is likely to flow from static or falling bank share prices.

That's a nasty environment in which to hand down a tight budget, and an even nastier one in which to hope to come back to surplus by 2012-13. All of which means there are likely to be large fiscal revisions in the November mid-year economic and fiscal outlook. Against that backdrop, I suppose a few billion in wasted first-home-owner grants and lost tax revenue hardly matter.