The now-bipartisan bank deposit subsidy scheme is a shortsighted policy which, far from solving the problem of housing affordability, is likely to push up house prices and make housing less accessible for first time buyers.
Under the proposed scheme, first proposed by the government, a limited number of eligible households earning up to $200,000 would require just a 5 per cent house deposit instead of the usual 20 per cent.
The remaining 15 per cent would be underwritten by the government-run National Housing and Finance Investment Commission.
The apparent objective is to encourage more lending, which is the exact opposite to what the government has been promoting for the past three years.
The banking royal commission, the $6 billion bank tax, and the Banking Executive and Accountability Regime have combined to cause a nationwide credit crunch. Interest-only lending, for example, has dropped from 30 per cent of all new owner-occupier home loans five years ago to just 7 per cent today.
Apparently unhappy with the results of its own regulation, both major parties seem to now want taxpayers to underwrite the provision of home loans to the riskiest of potential borrowers — those who cannot save more than 5 per cent of their wanted property value.
The moral hazard problem is obvious.
Usually when banks provide a loan to those with less than a 20 per cent deposit, they require the borrower to purchase lenders mortgage insurance, or LMI.
This protects the bank in the event the borrower misses mortgage repayments, which internalises the risk to the borrower and the lender.
Now banks will be able to do away with this responsible lending practice knowing full well that taxpayers will meet the costs of unmet mortgage payments.
This is precisely the financial logic that led to the growth of subprime mortgage lending in the United States in the lead up to the Global Financial Crisis. Indeed, the government appears to be setting up Australia’s very own version of Fannie Mae and Freddie Mac.
The home loan subsidy scheme likewise will also not necessarily encourage its own objective, though whether the size of the program is big enough to make major difference to prices remains to be seen.
In announcing the scheme, Prime Minister Scott Morrison said the policy will allow more young Australians to buy their first home. However, the effect is likely to be the opposite.
Government subsidies increase demand which in turn causes prices to rise, not fall.
Scott Morrison recognised this fact this when he criticised Labor’s child care policy to expand subsidies to parents on the same grounds.
But here’s the thing: If it really wanted to improve housing affordability, the government would address structural supply and demand issues in the market.
On the supply of housing, developers are hamstrung by red tape and over-regulation.
A 2018 report by the Reserve Bank of Australia, for example, found that restrictive zoning rules add $489,000 to the cost of the average Sydney home, compared with $324,000 in Melbourne.
Meanwhile, on the demand side, two decades of rapid population growth underpinned by mass migration have pushed many Australians out of the housing market, or to the outer suburbs, or into tiny apartments.
By ignoring these issues both Labor and the Coalition have decided that propping up house prices for existing homeowners is a better strategy than expanding that base through greater home ownership.
This is the opposite direction to that taken by the founder of the Liberal Party, and Australia’s longest-serving prime minister, Sir Robert Menzies.
Menzies understood that home ownership was a key conduit that connected the past, the present and the future. Homeowners are conservative by disposition. They oppose radical change, have an interest in preserving the amenity of their local area, and have a stake in the nation’s future.
Australians will not support capitalism if they are not capitalists themselves, and they will not support a society based on the sanctity of private property if they do not own property.
The government can cry that Labor is “socialist” all they want, but in a decade’s time the Liberals may realise that they have helped create the conditions in which socialism can flourish.