Grants have little impact despite what Gen Poor Me says: Terry Ryder

Multiple stories are told by a simple set of numbers published this week by the Australian Bureau of Statistics.

Investors are opting in, first-home buyers are opting out, next-time buyers are still dominant and state government grant schemes are failing.

The ABS data for housing finance in November showed a 1.7% monthly rise in seasonally-adjusted terms or a 2.0% monthly rise in trend terms. It’s the highest number of loans for any month in the past four years.

The greatest significance is the trend, because the value of loans for housing has risen virtually every month since December 2012. Year-on-year, home finance is up 15%.

The figures show that 84% of November loans were for people buying established homes, with only 16% taking loans to build or buy new dwellings. This is a normal outcome and provides further evidence that state government grant schemes are not doing the job they were designed to do.

Most states and territories now have schemes that provide grants only to people building new homes. The idea is to encourage people to build new rather than buy existing, thereby stimulating the construction industry and creating jobs.

It doesn’t work because the sums involved are too small. The average difference in the cost of a new home versus buying an established home of similar standard in the same area is around $70,000. A grant of $7,000 or $10,000 doesn’t even go close to bridging that gap.

So around 85% of buyers, including first-home buyers, opt for secondhand dwellings.

The importance of government grants is hugely over-rated. Many politicians, economists, developers, real estate agents and commentators apparently believe grants make a big difference – and therefore when few are building new homes or first-home buyers are quiet a great cry goes up demanding governments increase grants. Meanwhile, some of the Generation Poor Me types claim that the grants force up prices, thereby making it harder for young buyers.

But an analysis of buying patterns and available research over time shows that grants have little or no impact. Even when grants were much higher than today – back in 2008-2009 when the Federal Government made up to $21,000 available – multiple surveys showed that first-home buyers were busy because prices and interest rates had dropped markedly, which made homes much more affordable. The FHOG was not their prime motivation to be active buyers.

Government grants don’t generate buying activity nor do they create price rises. They simply don’t make a meaningful impact because the amounts are too small. Price decline (in the three years before 2013) and interest rate cuts matter a good deal more.

There is mounting evidence that young Australians are not as active as before as first-home buyers because they have simply chosen not be. Affordability is particularly strong at the moment, thanks to low interest rates and the pre-2013 reductions in prices, as well as steadily rising incomes. But Generation Lifestyle First has chosen to delay home ownership, in much the same way as recent generations have chosen to delay parenthood.

The ABS statistics this week also showed that the market share of investors has continued to rise. Investors now comprise 39% of the market. This will inevitably lead to some blaming investors for rising prices and calling for the end to negative gearing.

But what the figures show is that the dominant force in the market is not the investor segment, nor the first-home-buyer-with-grant segment. The dominant force is next-time buyers – i.e. home-buyers other than first-time buyers. In November 61% of borrowers were home-buyers, most of them next-time buyers.

If you want to blame someone for rising home prices, blame them – not investors (allegedly fueled by negative gearing) nor first-home-buyers (apparently boosted by government grants) nor foreigners (the latest scourge of the embattled first-home buyer, because the Chinese are buying high-rise apartments on the Gold Coast and in inner-city Melbourne).

Not that blame is appropriate, given that most Australians benefit (as well as the nation) when the value of their greatest asset rises.