Flat White

Rich Uncle Albo’s shared equity nightmare

12 May 2022

2:00 PM

12 May 2022

2:00 PM

For the worst-crafted, most ineffectual policy of this election campaign it would be hard to go past Rich Uncle Albo’s shared equity housing scheme. (And I use the word ‘rich’ advisedly, because it’s your taxpayer money he’s using to flirt with the housing affordability vote.)

This scheme will put up to $380,000 in equity into the bidding hands of a lucky 10,000 Australian would-be house owners each year who do not own any other property and whose income is $90,000 pa (or less in the case of singles) and $120,000 in the case of couples.

The lucky applicants will not need to pay any interest on the equity until they sell the property, or earn more money, and will be underwritten against loss in the event of a sale.

The scheme does get one thing right – the problem of affordability is not so much repayments, which in most states are at similar levels to where they’ve been for the whole of the last 20 years, but saving for the deposit.

Various levels of government have been giving first home buyers some assistance for decades, a little first-up leg-up to get voters into the housing market, knowing that over time homeownership will make them more financially robust, and also attuned to the serious issues that govern how an economy is run.

These hand-ups are generally universally available to first home buyers, and at a set amount – somewhere between $10,000 and $30,000, depending on the state you live in.

If you’re contemplating a first home in a market where average houses are worth over a million, even $30,000 doesn’t move the decimal point on the purchase price very much to the left, so many have been dealing with the balance of the deposit gap through the Bank of Mum & Dad.

But if mum and dad are under-capitalised, wouldn’t it be nice to have a rich uncle? Well, now you have Albo, and he’s so well-capitalised he’s not even too worried about you paying his money back.

How well-capitalised is uncle? Well, it was initially hard to tell from the official policy. Albo had the Parliamentary Budget Office cost it, but under the official accounting rules, that only involves working out the interest.

The office said the cost was $329 million, which ignores the $7.3 billion that will be the capital cost, not a profit or loss item, but it still goes on the total debt.

And the $329 million is a fudge too. The PBO only provides costings for the forward estimates, which is 4 years, but this scheme will be running much longer than that, even if it only exists for 4 years.

The average tenure in a first home is around 10 years, so some of the government’s ‘investment’ is still likely to be outstanding in 20 years, even if the average recipient pays it out earlier.

In 4 years’ time, the scheme will be ramping up, so interest will only be incurred on a portion of the eventual total debt. Added to that, I’m pretty sure the PBO did their costing a month ago when it was legitimate to use 2 per cent as the Commonwealth Bond Rate, but we now know that was the absolute bottom of the market.

Use today’s rate of 3.5 per cent or so, and the first 4 years of interest sums to $515,562,500, while the likely cost, assuming 10 years of average tenure, will be $3,075,125,000. (This interest rate shift needs to be borne in mind for all the other promises being made this election from whichever side.)

Yet, with all this money the scheme will only service 10,000 a year. In one way, this is a good thing. New home buyers purchase around 120,000 homes each year, so Albo is only helping 8 per cent of the total, and probably won’t affect the price too much for the other 92 per cent. But it also means that he will have to play favourites, because only a small group will benefit from his generosity.

And generous this scheme is. The purchaser doesn’t have to pay any rent or interest on Albo’s equity. As the ALP boasts, this means a benefit of some $18,000 tax-free to some purchasers (and that’s also at current low interest rates, it will climb as rates climb too). That’s very generous when the maximum assistance that the poorer people who can barely afford to rent get is $10,068 rental assistance pa. JobSearch for a single person with a child is also less than Albo’s house subsidy at $17,968, and you have to apply for jobs to continue to qualify for it.

It’s certainly much more generous than all the other housing affordability schemes that consist of a one-off payment. If the homeowner stays in the house for 10 years, then it’s $180,000. It’s also more generous than the existing New Home Guarantee where the federal government guarantees 15 per cent of your loan so you avoid mortgage insurance, but doesn’t advance any money. This costs the government around $8.6 million.

Perhaps the most concerning part of the scheme is its regressive and inequitable aspects. Homebuyers in Sydney and Melbourne can get more than twice the benefit that buyers in the regions of the outer states receive, and the more expensive your purchase, the greater the benefit.

So money is sucked from poorer and more remote Australians to subsidise bad town-planning decisions, which result in inflated house prices, in Sydney and Melbourne. Imagine if we paid people different welfare benefits depending on where they lived, rewarding those who chose high-cost locations and punishing those who frugally based themselves somewhere they could afford.

Labor used to be the party for the worker, now it is the party that sandbags its bastions in the goat cheese circles of Sydney and Melbourne.

It may also be leading some Australians into default. Deposit assistance schemes make some sense when prices are rising, but when they are falling it can be devastating for the purchasers who find themselves with an asset worth less than the mortgage. Interest rates account for about 70 per cent of house prices, so it is safe to say with them heading up not only are prices about to fall, but servicing costs are about to rise – two arms of a pair of shears that will decimate the robustness of the suburban budgets of the highly geared.

And in reality, it will probably not expand the number of people able to buy a home at all – it will merely shuffle the deck. The guy standing at the auction earning $90,000 or less will have up to $18,000 a year more servicing capacity than the girl next to him earning $100,000, so she’s blown out of the water and goes to his place in the queue.

This is thought bubble electioneering, no doubt conceived by a couple of 25-year-old staffers after watching a brace of focus groups, and conscious of the need to offer something different from the government. They probably think that the capital gain the government will prospectively make when the property is sold will pay for it, but that would be to neglect the loss of income on the money for all those years. And who knows when the property will be sold – the purchaser, not the government, controls that.

There is a path to better housing affordability, but it’s hard. It involves wrangling the RBA into setting interest rates at figures which represent a fair return for lenders as well as borrowers, as well as tightening the quantity of money in circulation, so that asset prices aren’t bid-up exuberantly. It also involves coercing the states into reforming their planning and taxation laws so that housing supply is flexible, and not burdened with extra costs and delays.

But that’s not a conversation Labor is equipped to even understand. This won’t be the last harebrained scheme from Australia’s next government. Expect lots more involving government interventions to fix self-induced problems, over-complicating and clagging the system, so that it becomes more and more difficult for the market to operate. Which will be proof positive to those in power that we need to do more of the same.

The problem with rich uncles is that gifts are generally about them and their need to be loved, not you, and your need to be self-sufficient. The more you’re dependent on them, the more they like it.

Graham Young is executive director of the Australian Institute for Progress and founder and editor of On Line Opinion.

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