Professor Alex Frino
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The NSW Budget will make it easier for first homebuyers to buy a house in the Illawarra: Truth or fiction? 

By Alex Frino, Professor of Economics, University of Wollongong. 

We often hear that houses are getting less and less affordable, making it harder for young people to own one. But does this really apply to the Illawarra, or is this just a big city problem?

According to the most recent data, the median value of a house in the Illawarra is around $650,000 compared to $410,000 five years ago – a rise of 59 percent over the last five years or a staggering 12 percent per annum.

It is great news for anyone who owns a house, because your house, probably the largest part of your wealth, is making you 12 percent richer per year! This beats the hell out of that high interest-bearing savings account at the local bank that promises a measly 2.5 percent per year.

But one person’s meat is another’s poison. And this is true of rising house prices for young Illawarra families looking to buy their first home. While the latest statistics tell us house prices have risen 59 percent over the last five years, they also tell us that average weekly full-time earnings have risen a pathetic 12 percent over the same period - from about $1400 per week to around $1600 per week.

This means that the ability of the typical Illawarra resident to borrow money to buy a house has fallen behind dramatically. It reminds me of that hit single in the 70’s by Max Merrit and the Meteors: “Slipping away from me”.

In response, the NSW government has decided to provide “relief” from the home affordability problem by dropping stamp duty for new home buyers. So, first home buyers no longer need to add $25,000 of stamp duty costs to the money they need to borrow to purchase a $650,000 home.

The government says dropping stamp duty means that the typical first home buyer will need to borrow $25,000 less and only fork out $650,000 to buy their house. So, presto, the price of buying the typical lllawarra house is $25,000 more affordable. But will it be?

The problem with this “magic” is that it ignores basic economics: that the purchase of every house involves a contest amongst bidders, where the highest bidder gets the prize – the house.

In this contest at least one bidder (the first time buyer) can now borrow and bid $25,000 more, which means that the price of house could simply sell for $25,000 more – and the first time buyer still needs to borrow $675,000 to buy it.

So the house is not really more affordable by $25,000 – nothing has changed really. Worse, houses are now more expensive for everyone, and the problem is compounded for those who outbid first home buyers in buying a house and then need to pay stamp duty as well.

So, returning to the original question I posed. Stamp duty exemptions provided in the State Budget will make buying a house more affordable for new home buyers. Fact or fiction?

The correct answer is fiction, I am afraid. It achieves nothing.

Posted in Business and Economy
Tagged: Economics