Whilst many have applauded the switch for the first home owners grant of $7,000 to a construction grant of $15,000, at National Property Research we are not convinced this is the best policy for the first home buyer (FHB) or the residential construction sector. There are some very good reasons why this may not prove to be the success it was planned to be.
The Proportion of FHB’s to Non-FHB’s
The first question that needs to be asked is whether this is about stimulating the FHB segment or the construction industry? If it is about stimulating the FHB into a buying proposition, then there is no reason to attach the imposition of only new property. By including this as part of the FHB grant, this buyer is essentially being marginalised into new innercity apartment product which is often expensive, or very small and inexpensive. Alternatively these buyers are being forced to the outer suburbs where there is a general abundance of new homes and greater choice, some affordable and not so affordable. The question then remains, what happens to the middle ring suburbs that have often been the mainstay of first home buyers, that could buy an established property (particularly older apartments) and receive the benefits of the FHB grant?
The FHB is an important part of the property cycle, typically representing around 26%-27% of all transactions. The spike in sales experienced in the early 2000’s and 2009 remain events that were influenced by government policy, not market conditions. As a result of this, the pull forward of this buyer segment often leaves a period of stagnation following. In the earlier part of the previous decade, the FHB cohort was instrumental in getting the residential market back on its feet. This was combined with a shortage of supply, growing population and a real estate market that had had minimal price growth for the previous ten years. It also created the environment where first home buyers were squeezed out of the market as can be seen in the above graph.
The number of loans for FHB’s and Non-FHB’s, 1991-2011
Now if the government is attempting to stimulate the construction industry, then the above graph clearly shows why targeting the FHB is proportionately a very small market segment. By trying to kill two birds with the one stone, the government has effectively polarised FHB’s to either end of the geographical spectrum of home ownership. Unfortunately the majority of new homes (be they apartments or houses) are not bought by the FHB but by purchasers who have achieved equity in their own property over a number of years. These are the purchasers who can afford to upgrade from their current established dwelling to a new property.
The established market relies on the first home buyer to allow the second and following home buyers to move in many instances. If the government was serious about stimulating the residential construction industry, providing a rebate of some sort on land purchases would not segregate one buyer type over another. If a twelve month horizon was applied between the purchase of the land and the signing of a building contract was instigated, significant incentive is placed on the purchaser to build. After all, this is the intention of the new legislation; right? If this is not adhered to, then the purchaser should repay the rebate. This could also be applied to the apartment and townhouse markets as well.
So whilst we suspect at National Property Research that the Newman government is attempting to do the right thing by the development industry, we would suggest that there are better ways of realizing it. Using one piece of legislation to achieve two separate outcomes is likely to prove to be inefficient in both instances. If the desire is to bring more first home buyers into the market, then enact legislation that makes it easy for the individual to transition from renter to owner occupier. If the desire is to stimulate the construction industry, don’t tie the legislation to the smallest buying segment.
It is time to rethink how the government interacts with the market and what the downstream consequences are. Unfortunately I remain unconvinced this will provide the shot in the arm the construction industry or first home buyers need, particularly as most financiers will not take into consideration the grant…and therein lies a whole other problem.