Government Incentives Could Have Unintended Consequences

As the Australian economy embarks on the road to recovery, a proposed Government incentive aimed at helping the building and construction industry has drawn criticism from some within the industry.

Under the new Federal Government program, buyers of newly constructed homes will be offered grants of at least $20,000 to help protect the building industry from the COVID-induced economic slowdown.

President of the REIA Adrian Kelly has called for caution on the proposed incentive that could negatively impact potential buyers.

“The REIA is concerned that measures which are directed at assisting the purchase of new dwellings in preference to existing dwellings could have a detrimental impact on buyer choice and market activity and thus lessen the economic impact.” 

According to Mr. Kelly, only 20 percent of first home buyers choose to purchase newly constructed homes.

“To limit any assistance to first home buyers to only new dwellings could lead to suboptimal outcomes in the utilisation of existing property and infrastructure.”

“This would come at a time when the proportion of first home buyers is recovering from investor activity in the market."

Mr. Kelly also noted that first home buyer activity is down considerably from where it was 20 years ago and the proposed Government incentive could exacerbate the problem.

“This would come at a time when the proportion of first home buyers is recovering from investor activity in the market. Since 2012 the participation of first home buyers declined until a pick up in 2017.”

“Whilst the participation of first home buyers has improved over the last year the current level is well down on the levels twenty years ago. Subsidising the purchase of only new housing will limit this recovery.”

Decoupling demand and supply

Leading Perth Builder from Sadhana Constructions and Co-Founder of the Perth Property Developers, Dr. Angad Singh feels that while something needs to be done, grants of this nature have the tendency to decouple demand from supply and create price fluctuation and instability.

“Whilst stimulus is welcomed and required and would be helpful for the broader market overall, the proposed grants are an artificial and unsustainable mechanism which can have disastrous long-term consequences.”

“Sure, they create jobs in the short-term, but they also create price bubbles in the affected market segments that, unless supported by population growth and other market fundamentals eventually implode.”

Dr. Singh points to the Perth market that has seen significant price falls in recent years on the back of oversupply of ‘first home buyer’ properties in the outer suburbs. 

The construction of many of these properties was fueled through previous state government incentives, and more than a decade on, demand is yet to catch up. Properties in these areas are still selling well below replacement cost.

“If you look at what happened last time an incentive like this was introduced in Perth, with the first homeowners grant after the GFC. Almost immediately, the price of land and newly built homes proportionately increased and became artificially inflated.”

“When it was announced the grant would end, buyers felt immense pressure as the fear of missing out on free money kicked in. This obviously further inflated prices and simultaneously caused a spike in future supply. So now you are in a position where supply has been brought forward, decoupled from genuine demand, and prices are artificially high because of grant funding. This is absolutely a recipe for disaster.”

Dr. Singh says that certain segments of the market will benefit but the costs will be felt down the road.

“When all was said and done, project builders and land developers ended up being the big winners in the scheme and homeowners were left with properties valued at well below what they paid for them.”

Instead of a short-term, reactive measure, Dr. Singh feels that there are other areas the Government could target to help stimulate the property sector.

“If we are going to stimulate the economy, we need to do it in a sustainable way with minimal interference on free-market forces, and in a manner respectful to basic market fundamentals. For example the creation of environmentally sustainable homes, or to address ageing in place or the provision of specialised disability accommodation.”

“Perhaps even the removal of stamp duty, an idea that has recently been discussed, would be an effective measure to stimulate the property market, without the fall out that would be created by a temporary grant.”

Limiting buyer choice

Will Farrell, Property Research Analyst at Ripehouse believes the proposed incentives could have other consequences.

“If the Government limits support to new dwellings only, then this will artificially limit the number of properties that eligible buyers will be able to pursue.”

“As REIA has pointed out, new dwellings tend to cost more - pushing eligible purchasers into higher price brackets,” he said.

Mr. Farrell is concerned that there will be a lag time before construction workers get any real benefit from any policy changes.

“It's difficult to critique this initiative given its details haven't been released yet but I'm concerned the Government's stated goals won't be achieved. According to AFR reporting, the goal is to prevent construction workers from becoming unemployed in September when a number of projects are finalised and their work dries up.”

“I'm concerned there'll be a significant delay between buyers finalising their building plans and construction workers receiving payment. The time between the two can often be months," said the Property Research Analyst.

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