Gavin R. Putland,  BE PhD

Wednesday, March 12, 2008 (Comment)

Apply your razor to the FHOG — surgically

Dear Mr Tanner,

I respectfully submit that the First Home Owners' Grant (FHOG) should be available only for new homes. Such a reform would fight inflation not only by reducing public expenditure, but also by easing the shortage of housing.

A shortage of housing is inflationary because it raises rents (which feed directly into the CPI), and because it forces employers to offer higher wages so that workers can rent or buy housing within commuting distance of the available jobs. The ultimate benefit of such a wage rise goes to lessors and vendors of housing, not to the workers; but the cost of it still feeds into prices.

The FHOG eases the shortage of housing only to the extent that it stimulates new construction. To maximize the effect on construction, the FHOG should be available for buyers who deal directly with builders, and for buyers of new homes (i.e. homes not previously occupied), but not for buyers of established homes. At present, however, the FHOG makes no such distinction.

The argument that overstimulating construction is itself inflationary is a furphy, because construction is mainly on the supply side of the economy. The more builders build, the more they add to the supply of housing and thereby push down on prices and rents. No employed construction worker, however well paid, is as inflationary as a vacant lot. Besides, the building industry is complaining about a slump in activity!

Ironically, the previous Government's temporary supplement to the FHOG, known as the Commonwealth Additional Grant (CAG), which was in force from March 2001 to June 2002, worked in precisely the manner that I have suggested. The FHOG should have worked that way from the beginning. Failing that, the previous Government, having introduced the CAG, should have kept the CAG and phased out the FHOG. Instead, it phased out the good idea and kept the bad one!

[Letter to the Minister for Finance; cc: the Treasurer & the Australian. Reposted June 28, 2012.]

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