Are government grants hurting housing affordability?
An economist with RMIT has urged the government to stop “pumping money into the housing market”.
According to Dr Peyman Khezr, who joined RMIT in 2022 as a senior lecturer of economics, finance and marketing, government interventions such as HomeBuilder, though well meaning, have unintentionally worsened Australia’s housing affordability crisis.
As he explained, grants activate only the demand side of housing, doing nothing for supply issues, thereby acting to tip the scales in a system that might already be out of balance.
“Grants, like HomeBuilder, shift the demand by enhancing affordability for potential home owners. However, the supply cannot respond rapidly enough in the short term to cater to this surge in demand,” Dr Khezr explained.
“Consequently, the price mechanism reacts to the excess demand by inflating the cost of home construction. This increase eventually diminishes affordability to a level where supply can meet demand,” he added.
HomeBuilder, which was introduced by the Morrison government in 2020, consists of a $25,000 grant made available to owner-occupiers “substantially renovating” or building a new home.
At the time, the government said the stimulus would “breathe life” into the residential property market after facing a prolonged downturn in the wake of the COVID-19 pandemic. Applications for the HomeBuilder scheme closed in April 2021.
Since then, the average time frame for off-the-plan units has grown to more than two years.
While “home affordability” stimulus grants are intended to help people afford to purchase or build a home, Dr Khezr explained that they ultimately help a few in the short term while hurting everyone in the long term, as prices increase due to a surge in demand.
“Put simply, grants rapidly stimulate demand while supply struggles to keep pace, ultimately leading to a rise in prices. Cash injections in the form of grants only inflate prices and deteriorate housing affordability in the long run,” he said.
The economist opined that instead of “pumping cash into the housing market”, the government should identify sources of market inefficiencies and regulate the market to address these issues.
Specifically, he took aim at areas that could benefit from greater regulation to even the playing field for buyers.
“For instance, speculation in the housing market is a significant problem that worsens housing affordability and exacerbates inequality.
“Adequate regulation could reduce or eliminate speculative demand for homes, allowing first-time home buyers to compete more fairly in the market,” Dr Khezr said.
“Other sources of market inefficiencies relate to the market mechanism itself.
“Regulations promoting consumer protection would improve fairness in the housing market and benefit home buyers in the long term.”
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