This is the wrong way to buy a home

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Scott Morrison says the government is preparing a housing affordability package for the May budget.

The Government plan’s to help home buyers — but there are some big issues.

GOING halves with Scott Morrison in a house is like a nightmare season of Big Brother, and it could be a nightmare for Australia’s housing sector.

Sharing is the latest idea from Canberra to try to do something about house prices. The government is looking at a ‘shared equity’ model that would see the government and homeowners go in to buy a house together.

You’d tip in, say, $300,000, and they’d tip in $100,000 (25%). Later, when you sold the house, they keep 25% of the value.

The idea is getting a lot of attention. State governments have funded smaller scale schemes and it works for those who are in the scheme. But it seems to have a few big side-effects.

1. Pushing up prices.

Imagine you’re trying to buy a house. The person you’re competing with has a spare $100,000 from the government in their pocket. You know they’re going to be willing to bid more than you.

In theory, a shared equity scheme wouldn’t push up prices — so long as people make sure their private contribution is not more than 75 per cent of the market value of the house.

In reality, people will pay more than that. Remember — they really want the place, and the only downside is that when they sell it they have to give away 25% of the sale price. A house is not a pure financial asset — it’s also a home.

(Remember that the value of an asset is equal to the benefits it provides while you own it plus the price when you sell it. (With appropriate discount rates applied, obviously!) Under this scheme, the homebuyer loses 25 per cent off the eventual sale but gets 100% of the benefits of the house, i.e. living in it. That’s what we call a sweet deal.)

I’d be surprised if some people didn’t pay up to 90 or 95 per cent of the original market value with their own money, and then chuck the government’s money on top.

That just pushes more money into the housing market. More money sloshing round trying to buy the same number of houses is only going to push prices up.

Great fun for anyone who’s in the scheme, but not so great for the rest of us and not a real solution to housing affordability.

Could Canberra’s plan actually make houses more unaffordable?

Could Canberra’s plan actually make houses more unaffordable?Source:Supplied

2. Not helping the worst off

Shared equity might help someone move to a good suburb instead of a just-okay suburb. Or help someone buy a house when they’re 27 not having to wait til they are 29.

Which is great for them. But it’s not going to solve problems for people for whom the housing market is totally out of reach. And it’s definitely not going to solve homelessness.

3. ScoMo’s private plan

State governments have done these plans before, mostly with government money.

Scott Morrison is seemingly willing to take us into more exciting territory, by getting the private sector involved as the co-funder. Having Macquarie Bank co-owning your house sounds okay right? After all most houses are already part-owned by the bank!

This is different though and it is not clear where it might end.

Hypothetically, a bank could onsell that share in your house. Maybe even launch it on the share market. It is not impossible they could bundle together shares in 1000 houses in Bondi and float the whole lot of them on the stock exchange. People could buy and sell Bondi Houses on the stock exchange all week, and the market price would affect the auctions on the weekend, and vice versa.

If the government allowed this it would actually have some upsides. It’d be a nice way for people to get a small stake in the housing market. You could start saving for a house by buying housing shares, and if the price of houses goes up, so do your shares.

But the extra trading could have an interesting effect. At the moment, it might seem like we have a lot of housing speculation but it is actually limited. To buy and sell houses you need to pay stamp duty. That’s a big tax on buying houses and it stops people buying and flipping them. If Australian housing were a listed asset you could buy and sell ten times a day speculation would be even easier and there would be margin lending, algorithmic trading, short-selling and all sorts of other derivatives available. Fluctuations might even out. Or they might be even higher.

One way to measure a bubble is by the number of wild ideas it throws up. The shared equity idea might be another sign the housing bubble is getting silly.

Jason Murphy is an economist. He publishes the blog Thomas The Thinkengine. Follow Jason on Twitter @Jasemurphy

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