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More housing stimmy

Good morning! ScoMo copped some heat yesterday for travelling to the UK while keeping Australians – 7.5 million of whom were born overseas – in the dark about their own travel ambitions, refusing to even provide "a vague undulating adjustable plan" towards opening the borders.

It's a fair point. Australia isn't part of the G7 and was only invited as a guest. We also have a well-paid High Commissioner stationed in the UK in former Liberal Senator George Brandis, who was appointed by Morrison and no doubt has a generously staffed office.

Should ScoMo have just sent Brandis and phoned it in?

Markets

Daily % change

AUD/USD

77.1

-0.5%

10Y Bond

1.45

0.0%

ASX200

7,312

0.0%

Brent (bbl)

73.1

0.7%

Gold (oz)

1,867

-0.7%

Iron ore (t)

212.0

1.0%

Bitcoin

39,742

2.0%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract.

The US S&P500 opened the week up 0.2% to set a fresh record high, having traded down for most of the day before a late surge. Local markets were closed for the Queen's birthday holiday (she was actually born on 21 April but that's just plain inconvenient).

Bitcoin bounce: You-know-who was at it again, tweeting that Tesla will resume allowing bitcoin transactions "When there's confirmation of reasonable (~50%) clean energy usage by miners with positive future trend". Bitcoin gained around 10% following the tweet.


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Analysis

More housing stimmy

Land use controls play the dominant role in making housing expensive.
Land use controls play the dominant role in making housing expensive. Lisa Benson

We really are a one trick pony here in Australia. Ok, two tricks – we're also pretty good at mining. Yesterday NSW Treasurer Dominic Perrottet announced that first home buyers will be given $25,000 grants, with the aim of "making home ownership a reality for more of our people". The grant will replace existing stamp duty concessions for first home buyers under the state's forthcoming property tax reforms (the gradual replacement of stamp duty with an annual property tax).

Stepping back: Australia has been using first home buyer grants for over 20 years, with limited effect. Home ownership rates were around 70% in the 1990s but have fallen to 64% today as house prices have rocketed up. According to Demographia, by 2004 all of the major markets in Australia had become severely unaffordable.

Right problem, wrong solution: Unfortunately first home buyer grants are of limited use in terms of improving home ownership rates. To be fair to Perrottet, it's just replacing an existing concession – but still, there are better options.

According to a 2006 paper published in the Australian Economic Review, such grants "typically bring forward the purchase decisions of these first time buyers, and grants will then have a limited impact in raising the equilibrium rate of home ownership".

They also cause market distortions, with a paper from earlier this year finding that in Sydney, first home owner grants caused "large distortions to the sales volume, price level, as well as area size of home transactions".

If you needed even more evidence, a 2008 Commonwealth Select Committee on Housing Affordability cited evidence showing that "the attempt to make prices more affordable [with first home owner grants] ends up pushing them higher", as "policies that simply give people more money to spend on housing are likely to be capitalised into higher housing prices". The reason it does that is because there is "limited capacity to augment supply in response to the ensuing increase in demand", so it tends to benefit "existing home owners at the expense of those seeking to purchase, including first home buyers".

The real culprit: Zoning, zoning and more zoning. Land use controls play the dominant role in making housing expensive, with the RBA in 2018 estimating that zoning raised detached house prices by 73% above marginal costs in Sydney.

Years (decades) of supply growing more slowly than demand has caused part of the decline in Australian home ownership. Unfortunately, reforming zoning laws is politically difficult – the beneficiaries are concentrated and organised, with the costs spread across the region, limiting the incentive to act – while throwing cash at first home owners is easy and sounds wonderful. So that's what we get.


The Wrap Up

  • ScoMo told reporters that G7 nations have shown a "strong level of support" for the hard stance Australia has taken on China.
  • Power creep: Victoria's Andrews government "is secretly negotiating with three crossbenchers to introduce specific pandemic laws that would permanently replace controversial state of emergency powers".
  • Some NSW local government general managers were paid a salary as high as $633,852 in the 2019-20 financial year – nearly $100k more than the Prime Minister.
  • After four elections in two years, Israel's Prime Minister Benjamin Netanyahu has been removed from office after a record 12 years in office.
  • Italy's government banned the use of AstraZeneca for those under 60. It's the latest in a long line of flip-flops, with the government previously banning it for over-55s, then halting it entirely, then resuming the rollout with a "recommendation" that it be used on older patients.
  • The Electronic Entertainment Expo (E3) was held over the weekend and included several new game announcements, especially for Microsoft's Xbox.
  • Blizzard Entertainment's Diablo II: Resurrected release date was leaked over the weekend, forcing the company to confirm that it will in fact release on 24 September (Australian time).
  • US President Joe Biden and the G7 threw their support behind Japan's hosting of the Olympics next month "as a symbol of global unity in overcoming COVID-19". It's now just 38 days until the opening ceremony.
  • The UK delayed lifting its lockdown restrictions by another 4 weeks, citing concerns over the Delta variant and to enable more people to be vaccinated and receive second doses. Only around 45% of the UK is fully vaccinated, while up to 61% have received at least the first dose.

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