“The irony of the Help to Buy initiative is that of a market failure being addressed by a market-based solution, rather than reform of the market.” JON STANHOPE & KHALID AHMED shred the logic of Labor’s signature housing plan.

 “A problem well stated is a problem half solved.” The approach to problem solving reflected in this statement, attributed to the prolific inventor Charles Kettering, not only makes finding a solution to a problem that much easier, it also saves us from chasing pointless or even counterproductive solutions.

We were reminded of this truism when reading the explanatory statement to the exposure draft of the federal government’s Help to Buy Program. This and the Build to Rent Program are the signature policies of the federal Labor government for addressing housing affordability, or more accurately, its decline.

Since the policy was announced and the implementing legislation introduced, the policies have been heavily contested. Notably, the Greens have been in a stand-off with the government for more than a year, and only agreed to “waive” the bills through as the parliament was preparing to rise. 

The Greens extracted from the government a promise for a $500 million injection of funding for public housing upgrades (a paltry $1740 per dwelling) and so avoided the embarrassment of having to vote with Peter Dutton.

For the government, the passage of this legislation before an impending election is politically convenient. The delay has allowed the government to take the moral high ground with Housing Minister Clare O’Neil denouncing the Greens for dragging out the twin housing bills while “real people get harmed by their politicking”.

As for the policies, which have been promulgated as market-based solutions to a housing affordability crisis, there appears to have been little, if any, public discussion of their merit. 

While there have been some muffled voices raising concerns about the effectiveness of the policies, the mainstream media has been largely preoccupied with the circus of conflict which was generated and the unquestioning reportage of slogans as justification, or otherwise, of the initiatives.

However, we note in relation to the Help to Buy initiative, the irony of a market failure being purportedly addressed by a market-based solution, rather than, say, reform of the market or a non-market solution.

Essentially, what is proposed is a shared-equity scheme under which an investor (the government) takes part ownership of an asset (a dwelling).

The upfront cost of purchase for the buyer (which is a minimum of 10 per cent of the price) is reduced to 2 per cent. The interest and loan repayments are similarly reduced because of the smaller amount of the loan. 

Over time, assuming their financial capacity improves, the household can purchase the equity from the government in minimum amounts of 5 per cent. The scheme is targeted at median to sub-median income households and involves an eligibility assessment. It is being sold as an innovative solution to the home ownership or affordability crisis.

Information blackholes for participants

However, we fear that the scheme will likely have information blackholes for participants, an overarching bureaucracy, potentially mismatched expectations and asymmetric powers between the equity partners. 

While it may be a useful path for public housing tenants’ transition into ownership, we are concerned it is not suited to the open market with a government as a partner.

Housing is a long-term investment spanning multiple phases of life, and households entering the market have differing circumstances and expectations. Over time, their lives may take different trajectories. What happens, for example, if a household’s income increases beyond the eligibility limit, but their circumstances do not allow full purchase of equity from the government?

Having only a part share of the property, the household is to be responsible for the full ownership costs, but will be required to share the increase in value with the government. 

If the value of the property decreases, that may be a different matter. The legislation dictates, for example, that the government’s share of equity would be increased to preserve the monetary value of its interest, if a decrease in the value of the house is due to a reckless act or negligence. Who is to decide if the household has been reckless or negligent? What are the consequences of a DIY project going wrong or not being to the liking of the equity partner (the Commonwealth Government)? 

We have previously written about the executive overreach and arbitrary exercise of powers by public officials, with good intentions, even legal, but indefensible ethically (An arbitrary and bullying exercise of the taxing power | Canberra CityNews), resulting in misery and lasting damage for people, for example, the Robo Debt scheme or the forced eviction of vulnerable tenants under the ACT’s infamous Public Housing Renewal Program.

Creating heartache and serious grievances

The Help to Buy legislation seeks to preserve, quite reasonably, the public investment in the dwellings being purchased. However, the discretion available to the administrators of the program over the long term and in a myriad of changing circumstances is certain to create heartache and serious grievances.

Besides the design challenges, a more fundamental problem is that the “solution” has no direct connection to or is oblivious to the cause of the problem, and is akin to a symptomatic treatment that has the potential to compound the “illness”.

The explanatory statement to the legislation (Page 1) identifies the problem as: “The key barriers to home ownership are saving for a deposit and servicing a loan. 

“It has been increasingly difficult for homebuyers to save for a deposit and, coupled with the increased costs of servicing mortgages, this has made accessing home ownership increasingly challenging for low- and middle-income earners.”

Really? Over more than a decade, dwelling prices have increased at a rate of two to three times that of disposable incomes. 

Growth in dwelling prices the key barrier

Capital gains on average have matched those of riskier investments in the financial markets – blatantly unjustified given the low risk, but of course most welcome for existing owners but an ever-increasing barrier for those trying to enter the market. 

While income growth has been subdued, it’s the growth in dwelling prices that has been the key barrier to home ownership.

Independent economists have long observed that the principal solution to housing unaffordability in Canberra and across Australia is to increase land releases to maintain a balance between demand and supply. 

The shared equity scheme is almost certain to advance purchasing decisions for those who can service the loan but do not yet have the requisite savings for a deposit, and similarly for those who cannot fully service a loan. In other words, it will stimulate demand even though the supply systems have consistently failed to meet existing demand.

However, any significant uptake of the scheme (a supposed measure of its success) is almost certain to heat the market and increase prices even further. 

While that would deliver good returns on any equity investment by the government, it would be very bad news for prospective homebuyers, which conjures up the adage that a brilliant solution to the wrong problem can be worse than no solution at all.

ACT government has full control of planning and supply

Governments across Australia have failed to address yet alone solve the underlying problem – ie, land supply. We acknowledge there are difficulties given the low risk-high growth norm of the housing market and the vested interests in drip-feeding the supply of land to keep prices high. 

Unfortunately, even where planning systems have provided adequate approvals, the industry has banked the approvals and drip-fed the market.

However, in the ACT, unlike anywhere else in Australia, the government has full control of the planning and land supply system. 

Under Andrew Barr’s leadership it has, nevertheless, delivered house price increases averaging 6 per cent annually. It is the monopoly supplier and a speculator in the market. 

Public housing and community housing are the well-established means to address affordability for people for whom the market fails. We have previously highlighted the appalling record of the ACT government in these areas, with the sale of more than a thousand units of public and social housing to fund the tram project. It has in addition emasculated the community housing sector.

Jon Stanhope was ACT chief minister from 2001 to 2011 and the only chief minister to have governed with a majority in the Assembly.