Whether it’s increasing rent or mortgage repayments, the surging cost of buying a house or simply finding a secure place to live, Australians are struggling more than ever with housing costs. And with a federal election around the corner, cost-of-living is one of the biggest issues facing voters.
Labor is spruiking the housing policies that it legislated over its first term, including the newly expanded Help to Buy scheme. The Coalition is promising to allow first home buyers to use their super to help purchase their home. Both parties are proposing a two-year ban on foreign residents purchasing existing homes.
But do the policies on offer from the major parties go far enough to help make housing more affordable for more Australians? In this podcast, two Grattan experts, Brendan Coates and Matthew Bowes, evaluate the housing policies on offer – and suggest that whoever wins the election should pursue more comprehensive reforms.
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Transcript
Kat Clay: Whether it’s increasing rent or mortgage repayments, the surging cost of buying a house or simply finding a secure place to live. Australians are struggling more than ever with housing costs .and with a federal election looming on May 3rd cost of living is shaping up to be one of the biggest issues facing voters.
Labor is busy spruiking the housing policies that it’s legislated over its first term, including the newly expanded Help to Buy scheme. The Coalition has promised to allow first home buyers to use their super to purchase their home, and both parties are proposing a two-year ban on foreign residents purchasing existing homes.
But do the policies on offer from both parties go far enough to help make housing affordable for Australians? I’m Kat Clay, and with me to cut through the election spin are two of Grattan’s housing experts, Brendan Coates and Matthew Bowes. Matt let’s start by talking about what’s been promised by both major parties.
The first cab off the rank is Labor, who have been talking up a range of the housing policies they’ve implemented over the last few years, including the Help to Buy scheme, the Housing Australia Future Fund, and increases to Rent Assistance. So, do these policies go far enough?
Matthew Bowes: Well, I think that’s exactly the right question, Kat, and the shorter answer is probably no, we don’t think they go far enough. So the clearest case here is when it comes to the Housing Australia Future Fund, that’s the $10 billion investment fund that the government has set up where the returns from that fund are used to go towards social and affordable housing, and at the moment, the way the government is using those funds is it’s writing contracts with community housing providers that will pay them to build around 40,000 homes over five years. Around half of those social housing, half of those below market rate housing.
And that amount of new social housing looks like it will help at least temporarily to stop the slow decline in the share of Australia’s housing stock. That is social housing. So currently it’s around 4% of the housing stock down from about 6% in 1990. The problem is that once the government has signed those contracts, the future investment returns from that fund will already have been committed.
So, they won’t have any way of ensuring that Australia’s social housing stock keeps growing in line with population. And especially given that construction costs have increased rapidly over the past few years. We think the government really should increase the size of the fund to something like $30 billion.
That would cost around $850 million per year in borrowing costs. But it would mean that we could build around another 37,000 social housing dwellings and ensure there’s that ongoing flow of investment in Australia’s social housing stock. When it comes to something like Rent assistance, as we’ve discussed in our last podcast, Labor has increased the payment rate by 27% over and above inflation in the past couple of years.
But we think there’s a strong case for a further increase of at least 50% for singles and 40% for couples to ensure welfare payment recipients who rent aren’t being forced into poverty by the rents they pay.
And finally on the Help to Buy scheme. This is a scheme where the government can take up to a 40% equity stake in a home alongside a first home buyer. That both decreases the difficulty of saving up for a deposit for those home buyers but also helps reduce their mortgage payments.
What the government has announced is that they’re increasing the income thresholds and the price thresholds, so that expands the number of home buyers who might be eligible. The problem is that the total number of places in the scheme is still capped at 40,000.
So, if anything, these changes just mean the scheme is less well targeted to those low-income households who need it most and increases the risk that the scheme effectively becomes a lottery for those who are applying.
Kat Clay: Brendan, when it comes to the Coalition, one of the big pitches for first home buyers is allowing them to access up to $50,000 from their super to buy a home. Is this an effective policy?
Brendan Coates: It’s certainly something that will help some people, particularly higher income earners into the housing market. So, it’s up to $50,000 of your super, or 40% of what the balance is, so you’ve gotta have. You know, a pretty sizable balance to make use of that full $50,000. And it’s certainly true that for many people the deposit hurdle is a big problem, particularly if you don’t have access to the bank of mum and dad.
The first big problem with this policy though, is it’s really not going to help those that are struggling to get into the housing market. So, it’s amongst those who are 25 to 34 years old. The poorest 20% of renting households have just $5,000 in their super, the top 20%. Of the same age bracket have more than $70,000.
So, it’s probably gonna help, you know, it would’ve helped someone like me. And I should say, when I left the World Bank, they gave me my money from my retirement savings as a check. And I used that to buy a house. And that was very helpful for me. The trick though, is that I was the only person who was going to do it.
Which was the big problem here as well, is that you will probably push up prices because as everyone’s borrowing capacity is increased, their ability to buy, it’s going to have the effect of pushing up house prices, although probably less than some of the estimates being put forward by the industry, which for an impact of on house prices, they suggest of something like 10%.
The other point I think that’s worth making here is it is also a bit of a tax dodge because the money that’s been put into super, that you are then being able to take out has been taxed only 15 cents on the way in when the money comes out, there’s no extra tax as far as we can tell on the, Coalition’s policy, which means that they’re then having income stream that they’ve been taxed really lightly on, and then they get to put it into the most tax preferred asset of all, which is owner-occupied housing, where there’s no tax on the imputed rent or the capital gains.
So, if you are going to do this policy, you should probably have some tax paid on the way out to make it more like people’s wages, which are taxed at full rates of personal income tax. Otherwise, you’re giving an incredibly tax preferred vehicle, largely to wealthier Australians to be able to go buy their first home.
Kat Clay: So just turning to another Coalition policy, they’ve also promised to change the serviceability buffer, and that was really interesting to me because it determines how much banks can lend to home buyers. And for those of us who have bought homes, you know, we have some experience of this. How would this policy work and what are the risks for lenders?
Brendan Coates: So at the moment, banks are required by APRA, the prudential regulator, the banking regulator to assess people’s ability to repay a loan that the bank might make to them, assuming the interest rate is three percentage points above the interest rate, they’re in fact being offered and to make sure they have enough income to service that without putting themselves into financial hardship.
What the, the Coalition wants to do is to instruct APRA. To write to APRA, instruct them to consider the impacts of that policy on first time buyers, and ideally to relax that serviceability buffer. I think Sukkar himself, the shadow housing minister said 2.5%, which means people would be able to borrow more on average and more people would be able to borrow to buy their first home.
Now, this is a great example of a policy that has conflicting impacts on some of the housing outcomes that we want. There’s no doubt that it would raise prices. That’s what we saw when the serviceability, rough buffer was previously relaxed following the 2019 election from 3% to two and a half. It was then subsequently increased in Labor’s first term of parliament.
And that we saw immediately house prices jumped. After that change took effect, but it’s also a policy that would probably boost the rate of home ownership. Because you’re helping some people to borrow for a home that can’t do it now, and it may even actually reduce rents because to the extent it supports, say, off the plan housing purchases, you may see lower rents.
So, it’s one of those ones where, you know, in principle, it probably makes sense to lower the buffer as long as you’re not ex exposing people to or exposing banks to big risks of non-performing loans. And individuals to risks of hardship, and that’s less likely to happen when interest rates have already risen so far.
But it just shows that it’ll probably raises prices. It probably boosts home ownership, and it probably lowers rents. So, two outta three in terms of the housing policy objectives we have in Australia.
Kat Clay: That was what was interesting to me is that they had changed that serviceability buffer to prevent kind of loans being given to people that were unable to service them. So, it’s interesting that situation has changed with the interest rate going up so much.
Brendan Coates: And that actually makes sense, Kat, to be honest, because there’s a much bigger risk of interest rates rising when the mortgage rate’s at 2% when interest rates are at zero, which is where they were during the nadir of the pandemic compared to the world we’re in now, where, you know, the mortgage rate is, close to 6% on average ’cause the cash rate is around four.
Kat Clay: Matt, A lot of these policies seem targeted at supporting first home buyers, conspicuously absent seem policies directed at reforming negative gearing and capital gains tax, which might try to reduce demand from housing investors. Is this because these are politically unpopular reforms, and why should these be on the table?
Matthew Bowes: Look, it does seem like our politicians are a bit tired of talking about negative gearing and capital gains tax, and if I’m honest, sometimes I am too. These are tax concessions that have been in the public debate for a long time, and we will be the first to say here at Grattan that we think their impact on the housing market has at times been overblown.
And that’s on both sides of the debate. So, for instance, in the analysis we conducted recently for the 2025 Orange book, we looked at what would happen if we rolled back these tax concessions, for instance, by halving the capital gains tax discount and living limiting deductions from rental losses only to related investment income.
And we estimate that house prices would probably fall by only about 1%. And while we would see a very small decrease in investment in new housing, we estimate that this decrease in housing supply would probably only raise rents by around $1 per week for the median priced rentals. So, these are really small changes, and the reason that those changes are small is just because the property market itself is really large.
So, the total value of Australia’s housing stock is currently more than $11 trillion. And rolling back these tax concessions in the way we recommend would raise about $11 billion in revenue. So, it’s just a very small drop in a very large ocean. That said, while $11 billion sounds like a very small amount in the context of the housing market, it’s a lot of tax revenue in the context of the budget that we’re foregoing without a strong rationale for it.
So, we could probably better use those funds either to improve the budget bottom line, which is in trouble at the moment, or to fund any one of a number of other budget priorities. On top of that, while removing these concessions might only have a minimal impact on house prices. It would help shift the balance slightly away from property investors towards home buyers.
And recent research suggests that this would help to increase home ownership rates maybe by a couple of percentage points.
Kat Clay: Just an extra question. I mean, do you think that, say this is a politically unpopular policy, is this the sort of thing that we might see a future government take on, but not in the middle of an election term?
Matthew Bowes: I think clearly this is something that’s been debated for a long time. I think the Australian public is very polarized on this issue. But when governments explain the need for tax reform really clearly, when they set out a clear agenda, what Australians will get when we do tax reform in terms of, in this case higher home ownership rates.
Better, better able to manage kind of the budget challenges we have. I think that Australians are willing to hear that argument. As you say, sometimes that just takes a little bit of time, and it takes a government who’s thinking a bit more about the longer-term issues.
Brendan Coates: If I could jump in there as well. Actually, Kat, I think the electorate is clearly polarized on this issue, but somewhere between a plurality and a majority of Australians in surveys have typically supported change. So, it’s not one that, to us looks like a big negative or net vote loser for a government that proposed it.
So certainly in 2019 the Labor then opposition took it to the election, along with a host of other policies, including the franking credits changes uh, which we think it had a much bigger impact on the electorate than say something like negative gearing in the capital gains tax discount. And in fact, as that debate unfolded, negative gearing in the capital gains tax scandal, it’s worth it being clear. The latter of those is more important, actually became more popular as policies. So, this is one where it’s not clear that there’s a big loss, but obviously, or it’s a big net negative, but it obviously would take up a lot of oxygen in an election campaign if a government was to propose it.
Matthew Bowes: Yeah, and I think Brendan the point there to make as well is that ultimately being honest about the size of these reforms and how they’ll impact the housing market is really important because I think Australians obviously are concerned about policy changes that will heavily impact house prices.
But if we are clear that ultimately this is just a change that will have a small impact on house prices, will somewhat increase home ownership and most importantly we’ll remove a tax concession that doesn’t have a strong rationale for it, then I think there’s a lot of openness to that kind of reform.
Kat Clay: So, the message from the podcast today is don’t fear tax reform. Both parties want a two-year ban on foreign residents purchasing existing homes. How much pressure are foreign residents placing on the housing market?
Matthew Bowes: Both Labor and the Coalition have committed to a two year pause on foreign residents purchasing existing properties. And importantly, that covers both foreign investors, so people who are purchasing investment properties in Australia from overseas. But also, temporary residents in Australia who want to purchase a property here to live in.
Ultimately, I don’t think this is gonna have a big impact on house prices or, or housing availability for Australians. And that’s just because temporary residents and foreign investors are just not that big a part of the market for housing. We’ve seen figures out there that suggest there might be 2000 foreign residents purchasing Australian properties each year that are existing properties rather than new properties in the context of a housing market where there’s potentially half a million properties bought and sold on an annual basis. That’s a very small change and there’s good reasons why the number of foreign investors and foreign residents purchasing Australian properties are very low.
And that’s because we already have a very punitive tax regime for foreign residents. So, say, if you want to purchase an $800,000 home as a temporary resident to live in, even prior to these policy changes, you would’ve had to pay around $40,000 in an application fee to the Foreign Investment Review Board.
And if your application’s unsuccessful, you don’t get that money back. And on top of that, there’s additional charges that the states put on these kinds of purchases. So, in Victoria, on an $800,000 home, they might be worth $60,000 in additional stamp duty that you have to pay as a foreign resident. And so, it’s not surprising most foreign residents, they’re not really looking to purchase properties. They’re usually looking to rent them.
Kat Clay: So, it sounds that that kind of purchasing is already disincentivized by the cost of the application fees and things like that.
Turning to a related topic, Brendan migration is often brought up as one of the key pressure points on housing availability. How is migration actually, impacting our housing market and I’m wondering, has this been blown out of the water?
Brendan Coates: I think yes and no, Kat. It’s just the reality is it’s somewhere in the middle. And overall, the effect is not the biggest driver of rising housing costs in recent years. That is, we’ve talked about before in the podcast, is the fact that people like me have decided they wanted a home office and now have a larger home.
And that really modest change in average household size arising from hundreds of thousands of Australians expanding the amount of housing they wanted, moving outta share houses to live on their own or with their partner or moving out of, family home was the biggest driver.
That was the equivalent of 275,000 more homes at its peak. A lot of that’s now unwound as housing costs meant that Australians are economizing on housing, but by comparison, the total stock of the resident population is back to the trend roughly that we were expecting to be on before the pandemic, so it’s clearly not the big driver.
That said, the Coalition has said they’re going to lower the number of permanent visas offered each year from 185,000 to 140,000 for the next two years and then stepping up to 150 and then 160,000 in the two years thereafter. And so, we know broadly where they’re gonna go for the next four years, but beyond that we don’t really know what the long-term number of visas they plan to offer is.
Whereas the government has set 185,000 permanent visas for this year and hasn’t been clear what those numbers will be like in future years. But if we take as a given what the coalition has said on permanent migration so far, it’s clear that those changes to the number of visas. We’re talking about 130 odd thousand visas over those four years.
It will have an impact on housing markets, but only in a delayed sense because those that get a permanent visa. Are often or typically people who are already in Australia. So, three quarters of the skilled visas on offer, which is the bulk of the program, go to those that are already in the country and about half of permanent family visas go to the people that are already here.
So the effect would be almost no impact on housing markets for the first couple of years, and only a gradual effect thereafter, as some people who would otherwise, who are currently here on a temporary visa, would otherwise get that permanent visa and stay, instead have to leave Australia because their visa expires.
And if we assume that 160,000 visas per year level that they’re gonna have in year four of the policy is then extended out over the rest of the decade, then we estimate that change would over a decade leave rents about 2.5% lower, than they otherwise would be. The Coalition did have a policy for a while there of looking like walking back the number of net overseas migration, which is the net gain in population through migration.
And if that pledge, if it had been enacted, would’ve had a bigger impact on housing costs ’cause it would’ve had a more immediate impact on the number of people in Australia. But they have walked that back in part because it’s not something government can really control. It’s made up of the decisions on the temporary visa program, which are demand driven programs about how many people choose to come, and also the number of Australians that choose to immigrate abroad. And so, they’ve walked back that, that back. And so therefore, we’re only talking about the permanent program.
And I think the last thing to mention there is that permanent program is mainly made up of skilled visa holders. So, if you’re gonna reduce the number of permanent visas, you’re really gonna have to reduce the number of skilled visas. And those permanent skilled visa holders, they offer big benefits to Australia. The fiscal dividend from every single one of those permanent primary visa holders on average, is about $250,000 in today’s dollars over their lifetimes, that they’ll pay more in tax than they’ll draw in services.
That includes the impact of state governments, of infrastructure and other costs. As we’ve said that if we leave that number at 160,000 for a decade you know, if that’s the Coalition’s policy, if that was to be take effect, then over the course of the next 30 years, the hit to federal government budgets would be $211 billion in today’s dollars.
So that’s a big impact depending on what part of the skilled migration system was cut. And it just shows the stakes. Yes, we can make housing cheaper by slowing migration, but it probably means you’re gonna pay higher taxes or enjoy fewer services than you currently enjoy today from government.
Kat Clay: Thanks, Brendan, for that detailed explanation. It’s a complicated topic and one that comes up a lot in these discussions of housing. As we’ve talked about before on this podcast, ultimately Australia needs to build a lot more homes if you want to make housing more affordable.
But one of the policies that matter is controlled by the states. How can the federal government encourage the states to actually get building?
Brendan Coates: So, you are right. This is really a challenge for state governments. The feds are often on the hook for the politics of it and what the, this Labor government so far in this term has tried to reach across that Commonwealth state, divide across, reach, across the, you know, the constitution and push the states to build more.
It’s done that by basically make, setting an agreement through national cabinet to try to build 1.2 million homes over five years. Which is a really ambitious target. And targets are good and they’re important, but more important is the fact that they’ve put $3.5 billion of incentive payments on the table to the states.
So, if the states exceed their share, their per capita share of that baseline of 1 million homes over five years, they’ll get $15,000 per home. If that was fully achieved, it would see rents be materially lower. The problem is that on current numbers, we’re probably only on track to hit 900,000 homes over the next five years.
In a lot of the forecast, it’s become really hard to build. Construction costs are up, interest rates have risen sharply this term of parliament, and it’s been hard to find skilled labour. And so, we need to revise. Those incentive payments, we need to set a new baseline so that the targets kick in at a lower level.
‘ Cause otherwise, states could certainly outside of Victoria, could enact great planning reforms and may not get anywhere close to getting any of the money that’s on offer. That money’s also only on offer at the end of the period after five years, and we should bring that forward. And then those targets, those baselines, we probably need to adjust them for changes in cyclical housing conditions.
So, it’s not just a flat target, that’s just a bet on where the construction cycle might go. It might be a bit like how the Commonwealth Grants Commission estimates the GST distribution. Interest rates were higher this year, so we’re gonna reduce the target ’cause that’s a harder environment for you to build houses into.
House prices were falling, so it’s probably a slightly harder environment to build houses into. Construction costs are rising. It’s probably a harder environment to build houses into. And then obviously the federal government controls the migration levers around getting more skilled tradies into the country.
And they need to streamline those pathways for employer sponsored visas, which we recommend in the Orange Book. And if anyone’s interested, you could check that out there.
Kat Clay: Yes, we do have an Orange Book, and it is available on our website at grattan.edu.au, and I’ll also put a link to it in the show notes, but a lot of what we’re talking about today has come from the Orange Book and also our recent research on rent assistance. Matt, finally, we’ve recently seen both Victoria and New South Wales introduce reforms to allow for more townhouses and low-rise apartments to be built in inner city areas.
Are there any lessons, there for the types of policies the federal government should be pursuing?
Matthew Bowes: Yeah, Kat, one of the really positive things we’ve seen over the last couple of years is a recognition from state governments, and particularly from the Victoria and New South Wales government, that we need to build more homes in our cities if we want to make housing affordable, and if we want to allow, say, older people to be able to downsize to homes that they are looking for.
If we want to allow young people in our major cities to purchase a home in the suburbs they grew up in, there’s real benefits to ensuring that our cities have the housing that people want. One of the ways that both Melbourne and Sydney are trying to achieve that goal is by building homes in areas that previously wouldn’t have allowed these kinds of homes to be built.
And the types of homes we’re thinking about here are, are more on the kind of gentle density side of things. So, townhouses, low rise flats, types of housing that previously the planning schemes in these areas didn’t allow. We are seeing reforms to, to make those types of housing possible to build.
Victoria, we think has the strongest scheme here. So, what their townhouse and low-rise housing code does is it outlines a basic set of parameters on what kinds of housing is allowed in residential areas. So, things like setbacks from the street, how much of your block you can build on, how large bedrooms need to be.
And so, then when home builders go to apply for a development application with the local council, they know that if their proposal meets the code. Then the council has to approve it, and that provides greater certainty to those builders, and it makes it more likely that we’re gonna see more of these kinds of townhouses and flats built in residential areas.
Whereas previously, each individual council was really incentivized to reject these kinds of applications in the hope that the homes would just be built elsewhere. We’ve also seen this kind of housing encouraged in New Zealand, which introduced a medium density residential standard a couple of years ago.
And that basically sets a floor on the kinds of housing that cities had to allow, which meant that more townhouses and flats were allowed to be built in urban areas. So, we think that this is something the federal government should seriously look at expanding nationwide. So, in the Orange Book, one of our recommendations was that the federal government could look to introduce something like a national townhouse code.
As part of its national competition policy platform. So what that would mean is that it would negotiate with states, it would put some money on the table that it would pay to states if they introduced this national townhouse code, which would set a minimum set of standards potentially modelled on the standards that Victoria’s outlined in its townhouse code.
But ultimately that would be up to the negotiation with the states. But the, the aim here would be to ensure that this kind of medium density housing, which clearly there’s strong demand for in our cities, is allowed wherever housing is allowed. And that would ensure that we start to; to get the kind of supply reforms we need to build the homes that, that Australians need in our inner cities.
Brendan Coates: Yeah, especially at a time when it’s really hard to build the one form of housing typology that is still relatively cheapest townhouses. So, when Auckland up zoned so much of its area of its city in 2016, most of the extra homes that were built were townhouses. And so, we could see a similar kind of flourishing of townhouses across the established suburbs of our major cities if we saw this kind of national competition policy style reform where the state feds put money on the table, and it basically encouraged the states to make that change.
And it’s something that looks to us to be pretty enforceable if they get that right.
Kat Clay: So, it’s not just cheap as houses, it’s cheap as townhouses. Thank you so much Brendan and Matt. It will be fascinating to see how the election unfolds, and we’ll be watching the policy recommendations from both major parties and doing further analysis of that as the month progresses. If you’d like to follow this key analysis, please find us on social media. We’ll be sharing it there at Grattan Institute on most major social media networks. As always, please do take care and thanks so much for listening.