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Post-Election: Coalition's Housing Scheme

Coalition’s Infrastructure Spending and First Home Loan Deposit Scheme After Surprise Win

In the recent federal election, the Coalition swept in with a surprise win which stopped Labor’s proposed housing reforms for negative gearing and the Capital Gains Tax stopped in its tracks. Directed at alleviating Australia’s long-standing problems with housing affordability, experts predicted that the reforms, in the short run, would likely have caused a further 2-3% fall in prices in addition to the drop in prices due to the current housing downturn.

“Construction activity is falling sharply, housing prices are declining and economic growth is slowing – this was the wrong policy and the wrong time.” - Ken Morrison, Chief Executive of the Property Council of Australia, observing of Labor’s proposal.

Ken Morrison implies that this, in part, was what ushered in the Coalition’s win, and is optimistic about the Coalition policies set forth for the coming years. The Urban Development Institute of Australia (UDIA) is also eager to welcome the return of the Coalition, applauding Liberal’s $100bn commitment to infrastructure and their First Home Loan Deposit Scheme.

With the election concluded, it’s time to have another look at these two key aspects of the Coalition’s incoming strategy.

$100bn to Infrastructure:

The returning Coalition government is expected to deliver on several key policies and funding promises. The 2019-20 Federal Budget put forth by the Coalition pledges $100bn to infrastructure. Across Australia, this includes:

  • $2bn for the Melbourne-Geelong fast rail, which cuts travel time to 32 minutes.

  • $4.5bn and $2.2bn respectively to the upgrade of regional road corridors and new road safety packages, plus $800m for programmes like Black Spot Program, Roads to Recovery and Bridges Renewal.

  • $1.6bn to be distributed over four years to the Urban Congestion Fund.

  • $9.3bn to Inland Rail Project, a 1,700km Melbourne-Brisbane freight rail line.

  • $4bn to Melbourne’s East West Link, which aims to connect the Eastern Freeway to Citylink in Parkville with a road tunnel.

  • $1.75bn to Northeast Link Melbourne, connecting the M80 with an upgraded Eastern Freeway.

Of the promised $100bn, Victoria is set to receive 27% of the infrastructure spending. The funding will be distributed thusly across the state:

  • $5.3bn to major Victorian projects.

  • $379m on Urban Congestion and Commuter Car Park Funds.

  • $1bn to ROSI.

  • $2bn to the Melbourne-Geelong fast rail.

There are, however, some concerns regarding the efficiency of the government’s planned spending on the Commuter Car Park Fund. It has been criticised as being a short-sighted method of relieving urban congestion. The money spent would see $68m go to building only 1,500 parking spaces. A suitable alternative would have been to spend on public transport instead by improving train quality to increase ridership and providing higher frequency feeder buses.

Another perspective suggests that the planned infrastructure spending demonstrates antiquated views which have no place going forward - using the money to ‘accommodate autonomous vehicles, electric cars and researching the viability of flying cars’.

The funding for infrastructure is also achieved through cuts in other departments, such as R&D tax incentive programmes over the years. This is a ‘lost opportunity for innovation'.

First Home Loan Deposit Scheme:

Under this scheme, eligible first home buyers (earning up to $125,000 per annum or $200,000 for a couple) would be able to purchase a house with a deposit of 5%, rather than the 20% that most banks require for a home loan. The Coalition has pledged $500m to this scheme, and expects to see the time taken for first home buyers to save for a property cut in half. The Morrison government frames the plan as a scheme that will ‘protect the value of your home and help first home buyers get into the market’.

Nevertheless, Brendan Coates of Grattan Institute is significantly less optimistic about the potential impacts of the scheme – or the lack of it. Coates argues that the problem for first home buyers isn’t deposits – rather, it is due to the high interest rates that first home buyers are often subject to (7% vs the typical 4%). He is also critical of the relatively high income threshold set, comparing it to New Zealand’s version of the scheme which sets the income threshold at $85,000 for singles and $130,000 for couples.

The higher income threshold means that of all potential first home buyers, only the top 10-15% of earners are cut off from accessing the scheme. Given that the scheme is capped at 10,000 loans every year, this means that at least some of the loans will be given to those who could have afforded to purchase a home even without the scheme’s assistance, limiting its availability for those who perhaps need it more.

The 10,000 cap also means that only 10% of first home buyers will be able to benefit from the scheme. At this rate, home ownership will have improved by less than 1% in the next decade. Yet a larger plan would likely see a rapid expansion in demand for housing, driving housing prices up higher. This would, of course, run counter to the entire point of the scheme, which is to improve housing affordability. The fundamental flaw in the Coalition’s plan is that it attempts to do so by increasing housing demand, rather than by allowing prices to fall. (ET)

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