Old is better than new

By Terry Ryder, 28th January 2012

Queensland has just announced an extension of its Building Boost Grant scheme – not because it’s working well, but because it isn’t.

So few people have taken up the $10,000 grants to build new homes that there’s lots of unused money, so the State Government is extending the scheme - originally scheduled to expire on 31 January.

The same thing has happened in the Northern Territory, where the Buildbonus grant program has had so few takers that the Territory Government is giving is another six months.

The underlying message here is that politicians don’t understand real estate and continue to tinker at the edges of the market with policies that don’t work.

It’s not that people don’t want like new homes – it’s that they’re too expensive and so most opt for established homes which are much cheaper.

A $10,000 handout is lovely but it’s only a fraction of the price difference between a new home and a secondhand one.

This is why the programs in Queensland and the Northern Territory – and many others around Australia – haven’t worked.

In Queensland the Building Boost Grant offered $10,000 to buyers of new homes priced under $600,000 between August 2011 and the end of January 2012. But only about 3,700 grants have been awarded, so the State Government is extending the deadline by another three months.

In the Northern Territory the Buildbonus scheme started in May 2011 but only 45 buyers have received a $10,000 grant. It was due to expire at the end of December but the Territory Government is giving it another six months and lifted the price ceiling from $530,000 to $600,000.

A study of housing costs published by the Australian Bureau of Statistics in November showed that the average new home costs $70,000 more than the typical established dwelling. In many areas the price difference is considerably greater – a recent study focused on the Brisbane City Council area showed that new house-and-land packages cost, on average, $120,000 more than established houses.

It’s ludicrous – indeed, almost insulting – to offer $10,000 to induce people to buy new rather than old when the grant is only a fraction of the price difference.

This is why 82 per cent of first-home buyers opt for an established dwelling.

There are all sorts of reasons why new housing is so expensive. We continue to build houses that are much larger than typical buyers actually need and, as the strident developer lobby groups constantly tell us, government taxes and charges are loaded into the end price.

It’s such a Yes Minister scenario for politicians to heavily tax housing and then offer a small fraction of that revenue to goad buyers into buying houses that they don’t want because they’re too expensive because of all the taxes government is charging.

While some claim our homes are over-valued, you could argue that they’re in fact under-valued given that the replacement cost is so much higher than the market price. How can you argue that the 10-year-old house with a $400,000 sale price is over-valued when the new version of the same house being built down the road costs $500,000?

This is why investors should never buy new product. Buyers of new houses or apartments who have to sell soon after settlement seldom get their money back.

They say a new car loses value as soon as you drive it out of the showroom. New dwellings are much the same.

In most cities around Australia, the worst performers on capital growth are the new homes in master-planned communities – the bulk of buyer demand goes to the much cheaper older suburb down the road.

Paltry handouts from governments – not even enough to cover the stamp duty – won’t change these fundamentals. But don’t be surprised if the politicians fail to notice.

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