Most of us would rather not know how two things in life are made: sausages and government policy. (Increasingly, there is a third thing – how Qantas undertakes maintenance on its planes, but that is beyond the scope of this article.) As a vegetarian, I am not really interested in sausages, but you cannot escape government policy.

It is with this thought in mind that I am trying to figure out what the Rudd  Government was thinking when it decided to announce a $1.5 billion injection into First Home Owners Grant (FHOG). This seems like sausage factory policy to me, no matter what is happening in the broader local or global economy. Before presenting my thinking on this, I want to emphasise that I am not against government injecting funds into the economy – but only when the policy implications are well thought out. The Government seems to have got it right with well-targeted payments to pensioners, low-income households and carers.

So why do I think that the FHOG policy was hacked together in a sausage factory? To begin with, it is targeted at the wrong people. The policy is not means tested and only serves to assist those who can already buy a home: that is, towards higher income earners. Throwing money at higher income earners does nothing to assist housing affordability and is (upper) middle class welfare.

The second reason this is really bad policy is that it will actually push up already inflated housing prices. The Real Estate Institute has recently estimated that the price of houses will increase by around about the same amount as the grant as a result of this policy. Hardly rocket science: if you give everyone that can afford a house extra money, all they will do is bid up the price by that amount. In other words, it further distorts an already inflated market. So the policy not only targets the wrong people, it has the potential to have a negative impact on the rest of us.

The third reason for concern is the opportunity cost of throwing money into this area. A better policy would be to use the money to increase our dwindling public housing stocks. We are seeing increasingly long waiting lists for public and community housing. We are also seeing jumps in rent across the board that are, in large part, driven by the problems of low housing affordability – the FHOG could potentially inflame this situation.

Much has happened in the twelve months since the Rudd Government took office. On the positive side, the apology to the Stolen Generation as well as the decision to sign Kyoto are important symbolic steps in two policy areas in which the Howard government was negligent. On the ugly side is the continued crackdown on social security recipients for technical breaches. On the bad side, the decision to not only continue but add to a scheme which artificially inflates asset prices is a policy not fit for public consumption.

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