More dollars for housing – but will it help?

Prime Minister John Howard yesterday put a promise to create low-tax deposit saving accounts for first-home owners at the heart of the Coalition’s pitch for re-election.

Under Howard’s $1.56 billion plan, two forms of saving account will be created:

The first allows adult first-home buyers to make contributions of up to $10,000 per year into a home deposit saving account. The first $1000 deposited each year is claimable as a tax deduction and interest earned on sums in the account are tax free.

The second is designed to allow adults to make a total contribution of up to $1000 per year towards the first-home purchase of a family member or friend below the age of 18. The contributions are tax deductible or, for people with no taxable income, subject to a 15% cash rebate.

Howard has also promised to exempt first homes purchased in shared equity arrangements between the occupant and a contributing family member from capital gains tax.

Questions are already being raised about whether this promise, which is strangely uncosted in the Coalition’s policy document, could become a tax loophole that will be easily exploited by wealthy property investors.

The saving account promise is similar to Labor’s $600 million plan announced earlier in the campaign, so much so that, according to the Housing Industry Association’s Chris Lamont, expressing a preference for one over the other would be like “splitting hairs”.

“Tax concessions under the Coalition policy appears more generous than what’s offered by Labor,” Lamont says. “But Labor has more of a focus on balancing the needs of home owners with the rental market, so overall they are both very good policies.”

The Coalition’s policy, like Labor’s before it, has been sold as a solution to the “barbecue stopper” issue of the campaign: declining housing affordability.

The reality, however, is that neither policy is likely to improve housing affordability, despite the multi-million dollar tax concessions involved.

HSBC chief economist John Edwards says a significant chunk of the benefit from saving accounts will flow into higher house prices.

“You would certainly expect it to have an impact on prices, but it would be unreasonable to imagine the whole offset will go into more purchasing power for the people with these accounts. A lot of it would go into higher prices,” Edwards says.

The HIA’s Lamont disagrees, but he does accept that the chief benefit of low tax account style policies lies more in promoting saving than in cutting the price of housing.

“These policies are about saving and getting debt levels as low as they can be,” Lamont says. “They are all about promoting a savings culture. We know people don’t save enough and this is about rewarding people who do.”

But if the real benefit of these policies is about promoting saving, rather than housing affordability, offering millions in tax concessions may not be the best way to go about it.

“If we’re interested in savings there are much better ways to do it, the best way is for the Government to run large surpluses and effectively have government saving,” Edwards says.

If only bigger surpluses and public sector saving had more pull around the barbecue.