It is obvious that we have a housing affordability problem in many markets.  Sydney and Melbourne are the two outstanding examples.  So what are the facts?

• Prices are growing at an undesirable rate
• First home buyers are declining
• Foreign investment is increasing
• Based on auction clearance rates, demand is exceeding supply

The government has a number of tools to deal with the issue, or in fact two issues.

1. Rapidly increasing prices and increasing mortgage repayments is a risk to the economy. If enough people cannot meet their mortgage repayments, it starts a domino process where banks, existing owners, businesses, self managed super funds, and many others are going to suffer.
2. First home buyers are being priced out of the market. Becoming a home owner has benefits beyond just owning a house.  It brings a sense of responsibility and stability to a population.

So what levers can the government use?

• Interest rates. The difficulty with increasing rates is that you hurt those who are just scraping through with existing repayments.  It also could put a damper on the whole economy.  There is little room to reduce rates at the present.
• Taxation. This is predominantly negative gearing.  Removal of negative gearing is likely to reduce the attraction of real estate as an investment and consequently reduce prices.
• Restrict foreign investment. Whilst rules are in place, there is the feeling that they are being ignored.  The current regulations also favour new apartment building which are being sold to foreign investors.
• First home owners grants.  There is considerable evidence that the main benefit of these grants is to sellers.  It drives up the price of real estate by the amount of the grant.

So here is a suggestion that addresses the two key issues above.  What if people using negative gearing, and foreign investors were only permitted to sell to first home buyers?  You can have the taxation benefits of negative gearing, or you can invest in new homes in Australia but you must sell to a first home buyer.  Maybe a maximum holding period could also be included.  Sale must take place within 5 years of purchasing the property.

Has anyone considered this approach?