In response to questions about housing affordability on Sunday’s Q&A Nick Smith announced changes to the Kiwisaver HomeStart scheme. He is increasing the income and house price caps for people to qualify for the subsidy. This policy has failed to improve housing affordability anywhere in the world and simply won’t work here. It is encouraging more people into even more debt that they can’t afford, at a time when even the Finance Minister is advising people to think twice before buying their first home.
It was a shame that Q&A allowed the Minister to announce this policy without challenging him on whether it will be effective.
Minister Smith’s announcement
Kiwisaver HomeStart allows ‘middle income’ first home-buyers to access a subsidy for their first home of up to $5,000-10,000 for an existing home and $10,000-20,000 for a new home in addition to using their Kiwisaver as a deposit.
Here are the details of Minister Smith’s announcement:
- The income cap for a single person will rise from $80,000 to $85,000
- The income cap for a couple will rise from $120,000 to $130,000
- The house price cap for Auckland will rise from $550,000 to $600,000 and $650,000 for a new house
- The house price cap for Wellington, Christchurch, Hamilton, Tauranga, Queenstown and Nelson-Tasman will rise from $450,000 to $500,000 and $550,000 for a new house
- The house price cap for the rest of the country will rise from $350,000 to $400,000 and 450,000 for a new house
So basically more people can access a taxpayer subsidy to buy increasingly expensive homes.
This scheme is a terrible idea for a three main reasons. Firstly it unashamedly helps the middle class, not those that actually need it. Secondly because it will help people get into ludicrous amounts of debt at a time when the market is already unaffordable. Thirdly it is doing nothing to fix the problem, in fact it is throwing petrol on the blaze by just boosting demand even further.
Will this make housing affordable?
This policy is designed to encourage ‘middle-income’ people to get into more debt at a time when the housing market (nationwide, but particularly in Auckland) is at record levels of unaffordability. It is encouraging young people to take a massive risk at a time when even the Finance Minister is cautioning first home buyers to wait. This seems like a case of very mixed messages from the Government.
Let’s look at an example of a single person earning $85,000 buying a $600,000 home in Auckland. Firstly this is seven times their income (the international definition of affordable is three times) and they will be lucky to find the house at all (the median house price was $821,000 in June). To make the purchase they will need $120,000 deposit, leaving them with a debt of $480,000. On current interest rates (4.5%) repayments would cost them around $600 per week – around 47% of their post tax income (repayments of up to 30% of household disposable income is considered affordable). That is onerous enough, but what if interest rates rise by a measly 1%? Repayments would rise to $80 per week – eating up over half of their income.
Is it really a good idea for Government to subsidise first home-buyers to get up to their necks in debt?
First home subsidy schemes haven’t worked overseas
Other countries in the world with a scheme similar to this have overheated housing markets; including the UK and Australia. It doesn’t work as a policy and it is obvious why if you give it a moment’s thought. Housing is already off the charts in terms of affordability. If you subsidise people to buy houses, that will only increase the demand for housing, which only succeeds in increasing the price.
Our housing market already has massive tax subsidies to the tune of several billion dollars. All this policy does is throw a few million more of taxpayers’ money into the equation. It is throwing good money after bad. We need to wean ourselves off our addiction to housing, not make it worse.