Grants do not help first home buyers An auction in Beecroft, Sydney. The Law of Unintended Consequences forever stalks government policy with few better examples than the mess that has been made of "helping" first home buyers or, to give this business its real name, hand outs for the housing industry. Both Treasury and the Reserve Bank are betting the transition of the Australian economy on the housing industry getting much busier as resources investment tapers. There is a somewhat plaintive note creeping into RBA statements about favourable conditions for housing while construction remains lack lustre. So the various first home buying schemes don't really help first home buyers Various state governments also are increasingly desperate to see more chippies firing nail guns and slabs poured. Too bad they've mostly been going about it the wrong way while only fiddling around the edges of the greater impediments to a healthier industry. A new housing estate at Wollert, Melbourne Photo: Penny Stephens Mind you, first home buyer (FHB) overall activity might not be as bad as recently touted. It's just the attempts to push FHBs into new housing that have failed miserably. Brisbane-based property analyst Michael Matusik puts some perspective into the January figures that seemed to show first home buyers deserting the market: "14.9 per cent of all loans were taken up by first home buyers during January. Now, despite what the headlines say, a 15 per cent market share is the long-term first home buyer average. The home loan volumes traded by first home buyers during 2009 and into 2010 weren't sustainable. In any event, Matusik is dismissive of reading too much of anything into December and January housing figures, the "off-market" months. More important is his consistent criticism of government FHB schemes. He's happy to say "I told you so" over the New South Wales and Queensland governments efforts to redirect their first home buyer handouts to favour new buildings. At some length on his web site, Matusik argues the industry is reaping the mistakes sown by misguided government policy. The [First Home Owners] grant by the way doesn't work. It hasn't offset the impact of GST on new property and in fact we have fewer first-home buyers than would have been the case. According to the ABS, there were 446,000 first-home buyers across Australia just prior to the grant. Today that number stands at 429,000. The average mortgage taken out by a first-home buyer today is $293,000, against a mean purchase price in the low $400,000 range. This gives many a healthy 30 per cent equity. However, this equity position has not improved in recent years whilst the size of first-home loans has increased. In short, the FHOG has also inflated the market. So the various first home buyer schemes don't really help first home buyers. And, if governments were honest, they really aren't that concerned about FHBs anyway - it's the developers and builders they want to keep occupied. What's more, the especially generous combination of federal and state schemes as the global financial crisis hit had the effect of pulling forward sales, briefly inflating real estate activity, pushing up prices and setting up an inevitable hangover. That might be justified when the economy is facing a sharp shock and an effort is required to keep the wheels turning, but those unintended consequences can't be avoided. So what could be done to gee-up housing construction without making life harder for first home buyers? The obvious answer is "a great deal," but most of it requires serious political determination and execution to fix the usual issues ranging from our federal tax system to zoning and state and local government impositions. Failing doing the hard work, Matusik offers a partial solution: What would help - extremely so - is removing GST for new property or making it payable on all property transactions. The former would be much better than the latter. We are reaping what we have sown. First home buyers don't need help. Nor do investors for that matter. They both really need to be encouraged to buy something new. At least create an even playing field. And get rid of the First Home Owners Grant. Of course, any reasonable economist and all state and territory treasurers know that stamp duty is a bad tax to begin with - economically, socially and morally - that should be replaced by a broad land tax with no exceptions, but that's another story. Michael Pascoe is a BusinessDay contributing editor