How to make the first home buyer grant work

It is clear that the Rudd Government has given housing affordability a prominent place in its agenda. The government’s efforts to reduce infrastructure fees on the fringe of Canberra are surely a step in the right direction, since such fees are, along with urban consolidation land rationing, responsible for destroying housing affordability.

In further pursuit of housing affordability, the Rudd Government has announced plans to increase the first home owner grant from $7,000 to $21,000 for new houses. The reviews are not nearly so positive, however. Some experts, including ANZ Bank Chief Economist Saul Eslake, see a risk that the program will simply increase house prices. This would, of course, simply neutralise the effectiveness of the first home owner grant.

While there is no disputing the good intentions of the government, Eslake and other critics are probably right. Any infusion of money into the housing market is likely to increase prices, simply because the supply of new housing is so strictly and artificially rationed by severely restricting the release of new housing land.

If there is one thing that economics makes clear, it is that rationing leads to higher prices. And, there have been few better examples of that principle of economics in action than the stingy land use policies that are in operation in virtually all of the nation’s major urban areas.

State governments, and in some cases local authorities, have fitted a tight noose around existing urbanisation, despite the fact that more than 99 per cent of the nation remains rural - not developed. As a result, new homes are not being built at a sufficient rate and those that are being built are far too costly.

For example, in recent years, house construction on the fringes of Sydney has been at 1950’s levels. The problem is that Sydney and the nation have far more households to serve than half a century ago but there has not been enough land made available on which houses can be built. Without the normal market supply of inexpensive new housing on the urban fringes, there is no way for house prices to go but up, as the larger first home buyer grant leads to higher prices.

The problem of first home buyer affordability needs to be addressed at its root. The Great Australian Dream was made possible by building housing on cheap urban fringe land. The cost of the land on which the houses were built was little more than its agricultural value plus the cost of providing streets and utility connections (most of that included in the developer’s price). If today’s land use planning policies had been in effect, much of suburban Australia would not have been built, there might not have been a Great Australian Dream and the nation would be less affluent. Affordable new housing on the city fringes is beyond reach until law, regulation and policy allow it to be built, Canberra’s money or not.

Probably no nation in the world has been more driven by egalitarianism and the hope for a better life for all than Australia. In that pursuit, generations of Australians have worked hard to better the future for those that follow.

But, more recently, radical land use policies have begun to extinguish this most attractive of Australian values. Restrictive land supply policies such as urban consolidation have made housing so expensive for up-and-coming households that many will never participate in the Great Australian Dream, unless fortunate enough to inherit their homes (how un-Australian can you get?).

What is even more troubling is that these radical policies were adopted without the slightest consideration of their likely longer term social or economic consequences. Indeed, some academic and planning elites scorn the likes of western Sydney from their upper-middle-class perches, unmoved by the reality that places like western Sydney had much to do with making Australia an inclusive nation of hope.

Few reforms could more restore the promise of Australia to younger households and immigrants than to abandon the radicalism that has virtually banned low cost housing on the urban fringe. In such an environment, larger first home buyer grants would also make housing more affordable.