Albo makes an admission about his new housing policy that is both staggering and completely obvious – this is who the real winners will be: PETER VAN ONSELEN

Experts have been warning that Albo’s five percent deposit scheme for first home buyers will only pump up already crazy house prices, and now the Prime Minister has admitted as much.

While he tried his best to downplay the counter-productive impact his new policy will have on the market, he nonetheless conceded on Wednesday that it would cause ‘a slight increase’ in prices.

The new scheme allows new homebuyers to make a deposit of as little as five per cent without mortgage insurance, with the government to act as guarantor for the rest of the standard 20 per cent deposit, and is supposedly meant to help younger people get a foothold on the housing ladder.

What could go wrong? Quite a bit actually.

In a market starved of supply, Albo’s demand booster will do what demand boosters always do: push prices even higher than they already are, all the while pretending to help the very people it leaves behind.

The timing couldn’t be worse. On Tuesday, the Reserve Bank held the official interest rate at 3.60 per cent, refusing a further cut because inflation was creeping back upwards.

Any potential buyers waiting for rates to fall further can think again. Not only are rates likely to stay at this level all year, housing values are on the rise again, even before Albo’s price-fuelling policy takes effect.

RBA Governor Michele Bullock was blunt about housing supply issues yesterday: governments are acting to grant more building approvals, but don’t expect any meaningful impact for at least two years.

Bullock’s line wasn’t a throwaway comment. It was the central bank effectively telling Canberra to stop pretending a demand lever is a supply solution. If the supply response is slow and approvals are falling, a bigger demand hose only floods the market with more bidders.

Labor has almost no chance of achieving its 1.2m new dwellings by 2029 pledge that it promised. Approvals are falling when they need to be rising. In July approvals dropped 8.2 percent, falling another 6 percent in August according to the latest data.

Apartments led the slide, and they’re the very type of affordable stock needed most to hit the 1.2m target. If the approvals tap is turning off, pumping up demand via all the benefits Albo’s new scheme offers will simply raise prices. It’s common sense.

And what happens if all these new home owners with massive mortgages and very low levels of equity start to struggle to make their payments? The taxpayer is on the hook because the government is acting as the mortgage insurer. And those ambitious buyers who lapsed on the mortgage will have credit issues that mean even higher interest rates if and when they try to buy back in.

All this while the rental market is still suffocating. The national vacancy rate sat at just 1.2 per cent in August. Tight rentals means rents go up, bringing in more investors who benefit from negative gearing and capital gains breaks, adding even further to the boiling demand.

In September national home values rose at their fastest clip in a year, with the median price now at a record high. Pour a brand new subsidy into that mix and you don’t create affordability, you cause a bidding war pushing prices further north.

Headline inflation ticked up to three percent in August, with housing a key driver behind the rise. Energy rebates are coming off, further pushing up inflation.

An economically competent government would think twice about pumping fiscal stimulation into such an over-heated economy, but not this Labor government. Its spending, according to the latest budget numbers, is at a non-pandemic record, well about taxation revenue.

Albo’s new home loan guarantee protects the bank, not the borrower. Taxpayers wear the risk if things go wrong.

Economists (and the RBA for that matter) have warned for years that demand side assistance for first home buyers only pushes up prices. It works politically but the help is largely a mirage. The benefit leaks to vendors via higher sale prices. The Productivity Commission even said as much and the RBA’s research shows that first home buyer loans are much more risky for lenders.

Ministers claim the scheme doesn’t override responsible lending laws. Technically that’s correct: lenders must still determine the loan is ‘not unsuitable’ under the National Consumer Credit Protection Act. But in the real world a government guarantee encourages a lender to run closer to the edge in who it approves. It’s the opposite of the prudence claimed when responsible lending laws were legislated.

There’s also a moral hazard problem. By shifting the risk from banks to taxpayers, we reduce the price signal that should discipline marginal lending. When prices stall or fall (not happening now of course), negative equity lands hardest on borrowers. Try refinancing then. Try coping with a job loss. The guarantee won’t save you, it saves your lender.

So who actually wins out of Albo’s new scheme? Not the entry level buyers without family help. They’re now bidding against more cashed up participants who can tap the same 5 percent entry ticket. Sellers are the real winners, as well as anyone already in a home and happy to see prices continue to rise.

If governments really want to help first home buyers they need faster approvals processes and a coordinated approach that targets the supply side of the problem. A closer look at negative gearing rules in the wider tax reform context wouldn’t be a bad idea either. That might also include changes to (if not outright abolition of) stamp duty, perhaps with a land tax substitute of some kind. More build-to-rent incentives are another option worth looking at.

Albo’s new policy might seem politically tidy, but economically it’s messy. It won’t solve affordability. If the government wants cheaper houses, it has to build more of them, or get out of the way of those who will.

Everything else, including today’s headline grabbing scheme, is mere theatre likely to do more harm than good.