People love something for nothing. And they hate missing out on it.
The astonishing roller-coaster in the housing industry is a good example of it. And, according to figures issued this week, the roller-coaster continued. Indeed, the Australian term Big Dipper might be more appropriate.
The Big Dipper has been caused by Governments messing around with the market, in particular with the First Home Owner Grant to a lesser extent by the pernicious levels of stamp duty.
The scheme was introduced on July 1, 2000. Under it, every first-time purchaser of a dwelling got $7000 cash. The theory was to compensate them for the introduction of the GST.
The scheme was flawed from the start. Dwellings were exempt from the GST, so there was no need for the grant to apply across the board. There might have been an argument for a grant to people constructing new dwellings because the GST was to apply to the labour and materials in construction, whereas the wholesale sales tax it replaced applied only to some of the materials.
But the housing industry managed to convince the Government that prices would rise across the board, so the grant applied across the board.
Pre-GST, the housing industry had already suffered a boom. Yes, suffered a boom, because boom and bust cycles are not very good for any industry. People scurried to extend before the GST would bump costs up. The inevitable consequence was that the high demand pushed up prices way beyond what the GST would do. And then there was an inevitable post-GST slump. The graphs show what happened.
There was a general slump immediately after the GST. Even the $7000 grant was not enough to off-set that policy announcement and the housing boom in created in the first half of calendar 2000. There was a pick-up in the established house market towards the end of 2000, indicating a return to a more normal market, but there was no pick-up in the new-house market because that was seen as incurring too-high GST outlays. Then the industry squealed that it needed to keep up construction activity. The Government — fearful of the electoral consequences of an adverse effect of the GST — caved in.
The industry is a very successful lobbier, particularly of unpopular Governments facing elections – as the Howard Government was in 2000 and early 2001. And so the Government extended its already flawed scheme. On March 9, 2001, it announced that it would double the grant to $14,000 for first-dwelling buyers who entered contracts before December 31.
They went wild. They love something for nothing. People queued up for new houses. The graph shows the dramatic increase in mew dwellings and the consequent tapering off in existing dwellings.
But now the scheme is tapering off, a bust will follow the boom as night follows day – particularly as there is no election in sight to entice the Government to extend the scheme.
Bear in mind the scheme applies irrespective of whether one buys a hut in the bush or a multi-million-dollar mansion on the North Shore.
By the September quarter of 2001, the number of new dwellings started had jumped by 33.7 per cent to 40,053 over the same period the previous year. It was obviously unsustainable. The population is hardly growing at all and the number of people per household has not decreased markedly.
Low interest rates have also helped the increase in activity, but Government policy changes are the major cause.
The desperate desire to grab the free $14,000 before it disappeared created a housing boom. But there was no free lunch. The price of housing is determined by demand. The free $14,000 probably increased the price of the average new house by more than that because it brought forward demand and artificially created scarcity and higher prices. Similarly with the $7000 grant for established houses – though less so.
The Government did no-one any favours in the long run, but – from the Government’s perspective — that does not matter. All that mattered was whether the Government APPEARED to do favours. It sure did. It was handing out cash like a spivvy car salesman. “”$14,000 cash back with every new home bought this year.” People swallow this stuff. Those utterly illogical “”$1000 cash back with every car bought” actually work.
It had to come to an end. The housing industry would like a continuous housing boom. It does not care that it chews up agricultural land or requires an unsustainable inflow of population, provided the boom continues. But logically it cannot. To take the extreme position the whole landmass cannot be taken up by houses.
The artificial boom is coming to an end. Mercifully, construction is an imprecise activity. No-one finishes on time so the boom will taper rather than plummet.
What should the Government have done?
One of the theories behind the GST was to replace inefficient narrowly based taxes with the broad-based consumption tax. Stamp duty on dwellings was supposed to go, but when the Democrats squeezed the exemption on food, GST revenues were trimmed, the states’ take fell and stamp duty on dwellings (the small end of town) were left in place. Abolition of stamp duty on shares (the big end of town) stayed in place.
So we have the absurd position of government (albeit state) taking in the form of stamp duty and government (federal) hading money back in the form of first home-buyers’ grants – both schemes costing large amounts of money to administer.
Worse, the artificial boom created by the first-home-buyers scheme pushed up prices and stamp duty revenues with them.
Stamp duty is inexcusably high. The regressive rates (a higher percentage as the house price goes up) have not changed for 20 years. A $300,000 dwelling is commonplace now. Why should someone have to shell out $9000 to the government when buying such a dwelling? Twenty years ago, such a dwelling would pass hands for, say, $40,000 and attract stamp duty of a more justifiable $600. We have been ramped into high stamp duty rates and unlike income tax there has been no hand-back relief by government because buying a home is a rare event in someone’s life so they cop it sweet. Worse, people buying investment properties in the ACT can deduct the stamp duty against federal income tax, making it more unfair on ordinary home-buyers.
If governments want to help home-buyers, they should abolish stamp duty (or cut it to, say, a flat $500 a transaction). And the ACT should get rid of the absurd compulsory energy efficiency rating which costs money and achieves nothing for the environment.
The roller-coaster in the housing industry in the past two years has been a government-induced fiasco that has helped neither the industry nor the consumer.