Kevin Rudd’s housing policy: increase house prices?

This is old, but I was busy. The story is Labor’s broad plans for housing affordability:

The housing industry has embraced Labor’s pledge to create a $500 million fund to make housing cheaper as new figures reveal a worsening affordability crisis.

Labor leader Kevin Rudd said if the ALP won the election it would create a fund that could save some 50,000 new home buyers up to $20,000.

Skip the details of infrastructure changes, red-tape removal, etc. The government’s response, while obvious, sets up our problem nicely:

Treasurer Peter Costello said Mr Rudd had got his sums wrong on Labor’s new fund, saying the actual saving would be $645 a house.

“So even if the amount were passed on in full, the saving on a $300,000 home would be about $645. That’s not a large amount and I don’t think he’s thought about how to make sure it’s passed on in full.”

Suppose Labor’s plans save a bunch of families (as we will call the unit) $500 on a house that they buy. Ergo, when bidding for a house, they can afford to bid $500 more than they could previously.

Remember that this policy is aimed principally at families who are losing bids on houses, because they cannot afford the prices. Here’s what should happen. In a hypothetical auction, suppose the bidding between two families (rich and poor?) gets to $40,000 (it may as well be that as $400,000 – if Zimbabwe has taught us anything, it’s that knocking off zeroes makes transactions easier). At $40,000, the poor familiy is tapped out, so the rich family bids $40,500 and wins the house, and the poor family keeps renting.

Now, Rudd’s plan lets the poor family go another $500 higher. So come that auction, the bid gets to $40,000. The rich family bids $40,500, which the poor family can now match, but the rich family can bid $41,000. Alternatively, the auction, depending upon its type (typically English, Dutch or Sealed-Bid, I suppose), may have stopped previously at $40,000 (when the poor family can bid no further) and now stops at $40,500 (when the poor family can bid no further).

The effect? An average saving of $500 per family has led to an average increase of $500 in house prices, and the poor families are still not getting their house.

Now, there’s chance that this isn’t to simple – perhaps Rudd’s plan will let the poor family bid just enough higher than the rich family to get the house. Two things: 1) the house prices will go up on average by the $500 anyway, at auction, and 2) the rich family will not get the house, and end up where the poor family was because there are simply more families than there are houses to buy. After which, Labor has an even bigger problem on its hands, because he had generated a reward system so extra-welfarist that rich families are being punished far too heavily simply for earning/having more money.

Welfarism is fine; extra-welfarism will usually lead any politician, government or country into real trouble.

I’m sure it’s not this simple; I’m sure there’s more to it than Howard’s first-home-owner grants, but at the end of the day, at the auction outside the house on a Saturday afternoon, it will make no difference. The same number of houses will be sold, at a higher price relative to before. If Rudd’s policy is to increase the number of houses available, he’s welcome to it – we can discuss, later, the total cost of public transport, roads, cars, ecological footprint, etc. of that.

By and large, in our country that clings to the edges, facing outwards, we’ve settled in the optimally-sustainable places already. We are using the freshwater and electricity available to us, and we’re already the least-efficient in terms of carbon emissions.

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1 comment so far

  1. Tom on

    So Kevin Rudd says we can save up to $20 000 on a house? If I cannot afford a $300 000 to $400 000 house at the moment, what makes him think I can afford it if it’s $20 000 cheaper?? Houses have more than doubled in price over the past six years. Houses that were $200 000 are now $400 000 and houses that were $400 000 are now close to $800 000. Bottom line, is a low income earner still cannot afford a house and break into the market and $20 000 is not going to make a difference. Interestingly, he was addressing members of the clergy, of which many will never be able to afford to buy a home of their own. I don’t think this one has been thought through and one must be blind not to see the great big gaping hole in it.


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