While housing assistance can come in many forms, Australian governments have four main instruments at their disposal: first home owner grants, stamp duty discounts, shared equity schemes involving government co-investment, and rent assistance. These policies aim to assist homebuyers and renters by reducing new housing purchase costs, lowering property transfer costs, facilitating access to owner finance, and assisting renters with their payments.
We found that a 67/33 weighting to first home owner grants and stamp duty concessions would help.
Our assessment of this set of policy tools found that no single tool can help address all the issues we face. Some of them even offset the benefits of others, which is why coordination of policy responses is so critical; otherwise, we risk a slide towards policy incoherence.
An excellent illustration of this is the current mix of state government support. For example, the Victorian government spends about $1 billion to $1.5 billion a year on housing assistance, with about 20 per cent of that allocated to first home buyer grants. The rest is largely made up of stamp duty exemptions. While economically efficient, our modelling showed that this mix drives down housing affordability, because housing prices rise by more than the value of the concessions and grants being made.
To move the dial on affordability at the state level, we found that a 67/33 weighting to first home owner grants and stamp duty concessions would help. This has the added benefit of allowing state governments seeking to address affordability concerns to act independently of their federal counterparts.
What about at the federal level? Since the recent pressure for housing market intervention was triggered by sharp increases in rents, our findings are supportive of expansions in rent assistance programs.
Managed by the federal government via the existing transfer system, Commonwealth Rent Assistance is a $5 billion program. In economic efficiency terms, rent assistance programs of this kind are less costly than buyer grants or government co-ownership, with an economic cost of 35 cents per dollar spent, compared with 50 cents for first home buyer grants. Also, because it is distributed through the income-support system, rent assistance can be targeted, better assisting low-income households and others struggling with cost-of-living pressures.
With two ways available to improve rental affordability, we also asked which is better: can states go it alone and improve affordability by altering their policy mix, or is it less costly for the federal government to boost rent assistance? We find that achieving a given improvement in rental affordability using only state government tools is approximately 18 times more costly than federal rent assistance.
Ultimately, the housing issues we face are being felt across the country, rather than in one state, territory or region. By balancing different instruments and coordinating efforts across layers of government we can take some of the sting out of the price spikes being experienced in the near-term. At the state level, a rebalancing of government spending will help housing assistance improve affordability, rather than worsen it.
But the heavy lifting must be done by the federal government, because expanding existing rent assistance programs is the least-cost and first-best response.