Providing tax breaks for older investors and buyers could be a more effective way of improving housing affordability.

The federal government's efforts to entice first-time buyers through grants and support schemes could have had unintended impacts on housing affordability, an expert said.

In a policy paper submitted to House of Representatives Standing Committee on Tax and Revenue, Raine & Horne Group executive chairperson Angus Raine said the introduction of the First Home Owner Grant (FHOG) and the other subsidies and grants aimed at first-home buyers only add fuel that further heats up the housing market and inadvertently erode affordability.

"When the FHOG was introduced in July 2000, it paid $14,000 to first home purchasers of new dwellings and $7,000 to purchase existing dwellings," Mr Raine said.

"At the time, the FHOG was criticised for driving up house prices, which raised questions about its effectiveness."

Figures from the Reserve Bank of Australia have shown that residential values have grown by 15% annually between 2001 and 2003.

The HomeBuilder Grant, which provides a $25,000 incentive for buyers building a new home, also had similar impact.

CoreLogic figures show that annual dwelling price gains have hit 20.3%, the fastest rate since June 1989.

"Agents from the Raine & Horne Group across Australia indicating that schemes such as HomeBuilder and other government supports have played a part in propelling transactional activity and price inflation, mainly as there is limited capacity to augment supply in response to increasing buyer demand," Mr Raine said.

"I’m a firm believer in allowing market forces in combination with monetary policy and banking competition to create more favourable buying conditions for first-time buyers rather than providing subsidies that artificially inflate real estate values."

Tax reliefs to boost housing supply

Mr Raine believes there are other strategies that would be more effective in addressing affordability and supply, such as tax breaks for older investors and stamp duty concessions for downsizers.

"Older property investors are being stalled by the prospect of paying large capital gains tax (CGT) liabilities that will ultimately slash their retirements nest eggs," he said.

"Several now older property investors who acquired quality, well-located investment properties 20-30 years ago for up to $350,000 in Sydney’s inner east and northern suburbs have indicated a desire to sell."

"The trouble is these properties are now worth $2.5m to $3.5m. In these cases, the 'exit tax' bill will be well over $600,000 per property."

An option that could be considered is providing a two-year CGT tax deferral to encourage more older investors to sell and boost the overall housing supply.

Mr Raine said this would have similar effect when the government temporarily allowed retirees to make up to $1m after-tax superannuation contributions in 2007.

"Consequently, property listings in Sydney skyrocketed as older property owners cashed in their housing chips and redirected their retirement savings to superannuation to take advantage of the tax changes," he said.

Providing stamp duty breaks for those considered as "last home buyers" will also unlock empty houses being held by older Australians hampered by the high transaction costs.

"Empty nesters are doing their sums, and downsizing doesn’t stack up after taxes such as stamp are forfeited duty when buying the last home," Mr Raine said.

While doing this might prove to be a cost to state coffers, Mr Raine believes that it is going to be a win-win situation as it will encourage more transactions.

Incentives to promote regional areas

Making regional markets viable, particularly for younger buyers would also help address housing affordability.

However, Mr Raine believes that to achieve this, enhanced infrastructure and more jobs are needed.

"I’d urge all governments not to give up on the idea of decentralising business," he said.

"If they can encourage more SMEs to go bush, this will create more jobs and make our regional centres more appealing to younger Australians struggling to buy into metropolitan markets."

Mr Raine said providing stamp duty waivers and discounts for sea- and tree-changers would be beneficial to promote regional markets.

"Decentralising the population away from the major capital cities will help manage down rising prices, while population growth will underpin regional economies and local property values," he said.

Photo by Юлія Вівчарик on Unsplash.