First Home Ownership Assistance and Savings Ethic

First Home Ownership Assistance Needs to be Based on Personal Savings Ethic

Government assistance to first homebuyers should be based on incentivising savings rather than delivering a lump sum for a deposit, according to the Real Estate Institute.

The most sensible approach was to use tax deducibility as an incentive to savings, Real Estate Institute of New Zealand (Inc), National President, Mr Graeme Woodley said today.

“Savings-based support involving tax breaks seem the most logical approach, since that would require the potential homeowner to make a contribution and a commitment.”

Mr. Woodley said the Institute had been advocating assistance to first home buyers for many years, but was wary of solutions which might serve simple social policy objectives but in doing so cause more problems than solutions.

“Like many we have been concerned about New Zealand’s declining rate of home ownership because home ownership is clearly a very desirable social objective, since it encourages thrift, savings and a sense of responsibility and community belonging.”

“But we believe any scheme to encourage access to first home ownership should recognise the distortions any form of lump sum, or de-facto lump sum, scheme might cause.

“Lump sums by way of government funded deposits or de-facto versions of lump sums such as guaranteeing mortgages for those with no collateral, is bound to cause distortions and could end up as another student loans scheme situation.”

Mr. Woodley said the Institute had closely inspected the Australian first home ownership scheme, which provided flat dollar amounts for first home deposits, and had concluded that such a scheme effectively removed part of the savings ethic while inflating housing demand largely for the benefit of the home construction industry.

“These are distortionary and therefore undesirable, economic outcomes when what you want is to encourage people into home ownership based on their own endeavors, not on the basis of diverting the taxes paid by higher income groups.

“The tax system presently is based on the concept that everyone is treated with equity and has equal opportunities and obligations. A lump sum scheme would be contrary to this since it would be discriminatory and open to abuse. But tax rebates on savings would not only make the benefits of home ownership incentives available to all, but would also serve the purpose of cushioning the impact of such a scheme on the market. A lump sum scheme would immediately increase demand for homes and put values under pressure, creating the very situation the government is seeking to overcome.”

Mr. Woodley also warned against a simplistic analysis of the reasons why home ownership was becoming more difficult. “Certainly prices are rising faster than incomes but part of that has to do with New Zealander’s passion for renovation which has a significant effect on raising property prices. Another issue is that New Zealanders use property as their primary form of saving and investment which obviously contributes to buoyant property prices.”

Mr. Woodley said the difficulty for first home owners was not just rising property prices putting the first home out of their reach, “but relatively stable incomes and a low inflation environment has seen that gap widen for those who don’t own homes, while those who do own their own home realise that upgrading and renovation, and paying the mortgage off at an accelerated rate, is for many the best retirement savings option.”

Recent research had indicated other reasons for reducing home ownership, including reduced job security, having children later in life, and rising discretionary consumer spending and debt levels.

Suggestions of guaranteeing mortgages and offering suspensory loans for those on low incomes also embodied a form of discrimination, “If we are going to provide first home assistance it should be available to all, but potentially graduated in terms of income”

“For that reason we believe a tax incentive – such as tax deductibility of savings up to a certain amount – offers the fairest option”.

Other possibilities included making mortgage interest tax deductible for first homebuyers, up to a certain level.

Mr Woodley said the Institute was keen to work with the government to provide workable solutions, “The one thing we agree on is that home ownership is an important social goal – it is an important part of the mesh which holds us together as a country.”

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