Page 1980 - Week 06 - Wednesday, 25 June 2008
and that in such a market prices would stay competitive. Price inflation happens only in a market where supply is constricted. Mr Stanhope has a monopoly control over land supply and he has been personally responsible for some of the inflation that we have seen over the past seven years in relation to land prices. He is the last person in this building entitled to accuse others of inflating house and land prices.
The other point that is worth making in relation to the criticisms of the stamp duty policy is that, aside from the government defending taxes on first home buyers of upwards of $15,000 as somehow being reasonable, in this town investors who purchase and pay stamp duty are actually able to write the costs of that off. So we have got the perverse situation where first home buyers, who are often competing with investors for properties, are disadvantaged by the taxation regime. Jon Stanhope appears comfortable with that situation. He maintains that it is reasonable, that it is indeed a good thing and that it is indeed irresponsible to change the arrangements whereby first home buyers are forced to pay extraordinary amounts of stamp duty, as they are now.
The opposition asked in estimates whether there were any plans for some form of guarantee by the government that participants in the land rent scheme would not lose money from depreciation of houses purchased under the scheme. The officials responded emphatically that the government was not prepared to provide a guarantee from its pocket to insure owners against depreciation of house values. I asked:
Given that people eligible for the scheme would be borrowing for the house rather than for the land and the banks would be giving money for a depreciating asset, are there any plans for any sort of guarantee scheme on behalf of the government?
The responsible Treasury official answered:
No. The simple answer is no.
If there was any doubt, the entire viability of the ACT government’s land rent scheme is exposed following the exposure of Treasury modelling assumptions in answers to questions on notice. Treasury advice confirms opposition fears that the land rent scheme would risk placing most qualifying families in negative equity circumstances. The land rent scheme flies in the face of all evidence that land generally increases in value over time while buildings depreciate. In its modelling Treasury expects buildings to depreciate at between 3.3 per cent and 2.5 per cent a year; that is, a 30 to 40-year effective life. This means that a $200,000 house will depreciate by between $5,000 and $6,000 per year.
Let us put that into perspective. In the first year of a mortgage the home buyer is typically paying almost entirely interest and very little capital. Not until at least halfway through an average mortgage does the home buyer pay more capital than interest. But in a normal mortgage the home owner does not face negative equity because land appreciates over time. But on a land rent mortgage, that $5,000 of depreciation each year will accumulate as a write-down of the home buyer’s equity without any offset from land appreciation.