The devil is always in the detail with federal budgets, and this year one line was extraordinary: a new HomeBuilder extension will cost $774 million.
Already more than 120,000 people have applied for $25,000 grants to build or renovate homes under the scheme, but what’s interesting is the budget’s expansion doesn’t change the number of grants or their value.
Instead, this huge injection of taxpayer funds into the property market will be drawn purely from increasing the allowable construction window from six months to 18 months, allowing existing participants to cash in.
Many were going to miss out simply because the $30 billion construction boom unleashed by HomeBuilder has stretched the industry to its limits.
But while it’s great news if you’re one of the lucky ducks who secured a grant, prices are going to skyrocket as all that demand makes it harder to secure a trade professional to work on your kitchen or whatever.
It all means we’re headed towards what housing economist Andrew Wilson calls a “feast then famine” cycle in the property market, with all that extra demand unlikely to continue past the program deadline.
“We’re going into overload, that will put upwards pressure on prices, but once you get through those grants it will be feast then famine because prices will be higher as building costs increase,” Mr Wilson told TND.
Treasury, after predicting last October that new dwelling investment would fall 11 per cent, is now forecasting it will increase 2.5 per cent in 2020-21, with housing construction already hitting record levels in March.
But it agrees activity will taper off, partly because population growth after COVID-19 is slower, reducing demand for new houses in coming years.
“Recent strength in housing market activity is not expected to be sustained,” Treasury said in its Budget commentary on Tuesday.
The issue though, according to independent economist Saul Eslake, is that even when building activity subsides prices will be much higher.
Mr Eslake told TND how governments have been using policy to improve home ownership for 60 years, but it usually just pushes up prices.
“Enabling people to pay more for housing than they otherwise would results not in a higher proportion of the population owning houses, but in the housing people already own becoming more expensive,” he said.
Mr Eslake said other Budget splashes to increase the number of first home buyer grants and extend 98 per cent mortgages to 10,000 single parents would also make housing affordability even worse.
Affordability woes
House prices are already rising at the fastest pace in a generation, and as first home buyers start to feel the squeeze, investors are flocking into the market to chase higher yields.
New loans for investors increased in March at their fastest pace since 2009, while new loans for first home buyers actually went backwards.
That behavior was also reflected in a sentiment survey, published by ME Bank this week, that found the soaring market was souring buyers.
The number of buyers feeling negative about the property market shot up 8 percentage points, while investor buying intentions increased three percentage points, according to the April survey of 1,000 people.
Mr Wilson said first home buyers are starting to feel the affordability pinch, whereas investors are just getting started.
“We’re seeing more investors and that will keep demand ticking over as we see less first home buyers – one is replacing the other,” he said.
“Investors have a better financial capacity to pay more … that will put further pressure on prices.”
It’s doubly bad news if you’re renting while looking to buy, because house prices will keep going up and rents too.
Annual national rent rates skyrocketed 4.9 per cent in April as the market caught up to rising prices, according to recent CoreLogic data.
That’s more than three times the pace of annual wages growth, which means those unable to rely on the bank of mum and dad to save for a house are rapidly being priced out of the housing market.
But Mr Eslake doesn’t expect rents to increase faster than the broader pace of inflation in capital cities such as Sydney and Melbourne, where vacancies are still elevated thanks to the COVID-related collapse in migration.
Investors are likely to continue pouring into the market until the RBA increases interest rates, he said.
Investors “will chase the market for some time – they’ll chase it until the RBA starts raising rates,” Mr Eslake said.
The post ‘Feast and famine’: Budget splurge on housing will hike home prices and hit affordability appeared first on The New Daily.
