An expert says the federal government’s attempts to encourage first-time buyers by offering grants and support could have had unintended effects on housing affordability.

In a policy paper submitted to House of Representatives Standing Committee on Tax and Revenue, Raine & Horne Group executive chairperson Angus Raine said the introduction of the First Home Owner Grant (FHOG) and the other subsidies and grants aimed at first-home buyers only add fuel that further heats up the housing market and inadvertently erode affordability.

Raine stated that the FHOG paid $14,000 to first-time home buyers of new dwellings, and $7,000 for existing dwellings.

“The FHOG was criticized for driving up house prices at the time. This raised questions about its effectiveness.”

According to the Reserve Bank of Australia, residential values increased by 15% per annum between 2001-2003.

Similar results were also achieved by the HomeBuilder Grant which offers a $25,000 incentive to buyers who build a new house.

CoreLogic data shows that annual price increases for dwellings have reached 20.3% fastest rate since June 1989.

“Agents from the Raine & Horne Group across Australia indicating that schemes such as HomeBuilder and other government supports have played a part in propelling transactional activity and price inflation, mainly as there is limited capacity to augment supply in response to increasing buyer demand,” Mr Raine said.

“I’m a firm believer in allowing market forces in combination with monetary policy and banking competition to create more favourable buying conditions for first-time buyers rather than providing subsidies that artificially inflate real estate values.”

Housing supply boosted by tax relief

Raine believes there could be other strategies that are more effective at addressing affordability, supply and demand. He suggests tax breaks for older investors as well as concessions in stamp duty for downsizers.

“Older investors in property are being held up by large capital gains tax (CGT), liabilities that will eventually slash the retirement nest eggs of their retirements,” he stated.

“Several now older property investors who acquired quality, well-located investment properties 20-30 years ago for up to $350,000 in Sydney’s inner east and northern suburbs have indicated a desire to sell.”

These properties are worth between $2.5m and $3.5m. These cases will see the property’s ‘exit taxes’ bill rise to well above $600,000.

One option is to offer a CGT tax deferral for two years to encourage older investors to sell their homes and increase the housing supply.

Raine claimed that the same effect would occur when the government allowed retirees to make $1m after-tax superannuation donations in 2007.

He explained that Sydney property listings skyrocketed because older property owners cashed in their homes and redirected their retirement funds to superannuation to benefit from the tax changes.

Stamp duty exemptions for “last home buyers”, will allow older Australians to buy empty homes that are not being sold due to high transaction costs.

“Empty nesters are doing their sums, and downsizing doesn’t stack up after taxes such as stamp are forfeited duty when buying the last home,” Mr Raine said.

Although this could be costly for the state, Raine thinks it will be a win-win situation because it will encourage more transactions.

Promotion of regional areas through incentives

A regional market that is viable for young buyers, would help to address housing affordability.

Raine says that in order to do this, we need more infrastructure and jobs.

“I’d urge all governments not to give up on the idea of decentralising business,” he said.

“If they can encourage more SMEs into the bush, this will create additional jobs and make our regional centers more attractive to young Australians who are struggling to buy into metropolitan areas.”

Raine stated that it would be beneficial for regional markets to offer discounts and exemptions from stamp duty on sea- and tree-changers.

He stated that “Decentralizing the population away form the major capital cities will help lower rising prices while population growth will support regional economies and local property value,”