Economic Principles and Decision Making Report 2022

Running head: ECONOMIC PRINCIPLES AND DECISION MAKING
Comparative analysis of the First Home Owners Grant (FHOG) and the First Home Plus
(FHP) facilities in Australia
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1ECONOMIC PRINCIPLES AND DECISION MAKING
Introduction
In the housing market of Australia, First Home Owners Grant (FHOG) and First Home
Plus (FHP) scheme are two major assistance schemes for the first time home buyers or owners.
While FHOG is entirely a grant for the first time home owners, FHP is a facility for earning
concessions on the transfer duty to the first time buyers of new as well as existing homes in the
states and territories of Australia (Revenue NSW, 2020). Both the schemes have some eligibility
requirements, some similarities as well as some differences. The report presents a comparative
discussion on FHOG and FHP on the basis of the eligibility criteria, similarities, differences and
impact on the demand, supply and price elasticity of demand in the housing market. It will also
discuss the market structure for the FHOG scheme followed by the critical evaluation of the
statement on stamp duty by Ken Henry.
Discussion
Comparison between FHOG and FHP
First Home Owner Grant (FHOG) is a scheme for assisting the first home buyers in
purchasing housing property in Australia. It was established in 2000. This scheme offsets the
effects of GST on the home ownership for the first home buyers. Each of the Australian states
and territories has different legislation, eligibility criteria and own exemption rules for FHOG.
This is a grant, and hence, the first home owners are not under any obligation to repay the grant
and thus, it is different from a loan and also does not incur any interest or debt. The aim of this
scheme was to ease some financial burden off the first home owners (Revenue NSW, 2020).
The First Home Plus (FHP) scheme is another assistance scheme for the first home
owners in Australia that is based on concessional rates on the transfer duty. This scheme is

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applicable for purchases that are made before January 1, 2012. This scheme is applicable for the
first buyers of new as well as existing homes, while the purchase was made between July 1, 2009
and December 31, 2011and had a land or home value below the applicable threshold of the
scheme (revenue.nsw.gov.au, 2020).
The eligibility criteria for FHOG are different in different states and territories, however,
some of the common eligibility criteria are as follow:
 Applicants must be buying or building their first home
 Each of the applicant must be above 18 years
 At least one of the applications must be Australian citizen or permanent resident of
Australia.
 Each applicant must apply as individual and not as trust or company
 At least one applicant must buy the property as primary residence for continuous 6
months with 12 months of purchase settlement or construction.
 The applicants and their spouses should not have owned residential property or land
before and after July 1, 2000, and occupied that for 6 months.
 Total value of the residential property must not be more than the grant amount
For the FHP, the eligibility criteria are:
 The purchase must have been made between 1st July, 2009 and 31st December, 2011
 Age of applicants must be over 18 years
 Applicants should be individuals and not a company or trust
 The property must have been purchased by the applicants alone or jointly
 At least one of the owners must be Australian citizen or permanent resident

3ECONOMIC PRINCIPLES AND DECISION MAKING
 Each applicant must be staying in the property for continuous 6 months within 12 months
of purchase or building the new home
The above criteria for both the grant schemes are similar. However, the differences lie in
the conditions for a home to be marked new in case of FHOG and the transfer duty in case of
FHP. For obtaining the FHOG, the applicants are not eligible for the grant, if they are buying any
exiting home. The property will be considered new, only if that was never sold before and if
there was no occupant before the buyer, including the builder or tenant (Qld.gov.au, 2020). On
the other hand, FHP is applicable for purchasing both the new and existing homes. In other
words, unlike in FHOG, buyers will be eligible for receiving concessional rates on the transfer
duty while purchasing a home first time, and property can be new or existing.
The other differences include in the timeframe of occupancy of the property purchased,
duration of living in the purchased property, timing for applying for the grant, time of renting the
property before moving in and renting rooms. In case of FHP, the applicant must occupy the
purchased residential property within 1 year of the transfer date, and must live in the property for
the 1 year. The applicants get five years for applying for a refund if the concession wasn’t
claimed at the purchase time. Moreover, for FHP, the applicants are not allowed to rent out the
whole property before moving in and a single room after 1 year of moving in
(revenue.nsw.gov.au, 2020). On the contrary, for FHOG, the applicants must occupy the
purchased home or newly built home within either 1 year of title registration, or 1 year after the
final inspection. The applicants must also live in the new property for continuous 6 months. They
get 1 year after the transaction is completed to apply for the FHOG. Moreover, the applicants
cannot rent out the property before moving in, but, they can rent out one or more than one rooms

4ECONOMIC PRINCIPLES AND DECISION MAKING
during the 6 months provide that does not affect the use of the purchased or newly built property
(Qld.gov.au, 2020).
By evaluating the terms and conditions of FHOG and FHP, it can be seen that there are
many clauses that are similar, however, there are some differences in the two schemes. By
comparing those clauses, it can be said that while FHP is better for purchasing both new and
existing residential property, but it does not allow renting out of the property before moving in or
even renting out one or more rooms in the first year after moving in. On the other hand, FHOG
gives that flexibility of renting out of the property or a single or more rooms within the six
months of occupancy. This is highly beneficial for a majority of the population, like students,
expatriates and Australian citizens who migrate to the cities for work. This policy is helpful to
meet the excess demand for housing primarily in the urban areas, where the population is dense,
demand for housing is much higher, pushing the prices of the housing market. Hence, FHOG is a
better policy than FHP.
Impact of First Home Owners Grant (FHOG) on the demand and supply patterns in
Australia’s housing market
The purpose of FHOG is to ease off the financial burden of the first home buyers of
Australia. In Australia, the housing market is facing the challenge of continuously increasing
prices. There is excess demand in the market for residential property, however, as the supply is
inelastic and limited, the excess demand has pushed up the price of the houses. This has created a
massive burden on the home buyers, and according to Parliament of Australia (2020), the FHOG
is a direct subsidy to the first home buyers. It has the similar impact on the recipients as any
fiscal subsidy by the government. Subsidies are provided in order to promote the growth of a
certain section of the economy and the subsidies have opposite impact of the taxes as it reduce

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the price paid by the consumers, raise the price obtained by the suppliers an thus, increase the
quantity supplied in the market (Zainal et al., 2019).
Figure 1: Effect of FHOG
Thus, it can be seen that the short run supply curve for housing market is highly inelastic
due to limited supply. Due to FHOG, or the subsidy, the disposable income increases and
consequently, demand for housing increases in the market, shown by the rightward shift of the
demand curve. This raises the price for housing in the market from the initial equilibrium price
of P, and the new equilibrium is reached at a higher price Ps. At this price, supply is increased
slightly, from Q to Q’. However, due to the subsidy, that is, FHOG, the buyers have to pay a
lower price, that is, Pb. The difference between Ps and Pb indicates FHOG amount. Hence, the
benefit of the grant is shared by both the buyers and sellers, however, the magnitude of benefits
depend on the relative elasticities of demand and supply (Oh, 2018). For example, in the image
above, demand or housing is relatively more elastic than the supply in the market. In this case,
the suppliers receive more benefit from the grant in the short run, and eventually, the price level
will rise further in the market due to the introduction of FHOG. In the housing industry, across

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the 6 states and in the Northern territory of Australia, the FHOG benefitted in terms of rising
value of the properties and equities for the existing home owners. It was also beneficial for
boosting the housing market, however, the rising property prices again affected the housing
affordability for the buyers. It was also noticed that the number of FHOG applicants was higher
for purchasing already built home than to build a home by the buyers themselves due to the cost
and timeline involved in the construction of housing (Mousina, 2020).
Figure 2: Housing demand and supply in Australia
(Source: Mousina, 2020)
It can be seen from the demand and supply trend in the housing market that FHOG was
introduced in 2000 and since then till 2018, for most of the years, the housing demand across
Australia is higher than the housing supply, implying that although FHOG was a subsidy to the
first home buyers, but due to relatively inelastic supply curve, the suppliers got higher benefits

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and eventually, demand was greater than supply, keeping the prices higher and unaffordable for
many (Mousina, 2020).
Structure of the housing market of Australia
The housing or real estate market consists of the participants like buyers, tenants, owners,
renters, suppliers or developers, renovators and facilitators. The market structure follows
oligopoly characteristics. As defined by Lee, Naito & Lee (2017), in an oligopoly market, there
are less number of sellers in comparison to large number of buyers, and each seller sells
differentiated products, which are not perfect substitutes of each other. The sellers act as a group,
and hence, one price decision made by one seller is matched by the responses from other sellers.
In the housing market of Australia, the number of buyers is significantly large than the number
of suppliers, and hence, it leads to excess demand for housing in the market. The dwellings
supplied are not perfect substitutes of each other and thus, the sellers practice price
discrimination (Wong, Li & Monkkonen, 2019).
The supply of housing is limited due to lack of lands and thus, the supply curve is almost
vertical and relatively inelastic in the long run. Less quantity supplied than the existing market
demand raises the prices higher and makes housing unaffordable for the buyers. The factors that
affect the housing market are classified into demand side factor and supply side factor. Interest
rates, economic growth, availability of mortgages, number of buyers, housing affordability and
speculative demand are the demand side factors while number of supplies, quantity supplied and
new constructions are the supply side factors (Saunders & Tulip, 2019).

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Critical evaluation of stamp duty
Former treasury secretary of Australia, Dr. Ken Henry stated that the stamp duties are
creating unfair obstacles for the young first home owners in Australia. Stamp duty refers to the
charge levied on the legal documents for single property purchases. In Australia, the stamp duty
is quite huge, and that is an added burden on the buyers. Dr. Henry mentioned that stamp duty is
a bad tax that is distorting the housing market and it should be replaced by annual land tax. Due
to this, the existing owners are not willing to sell their properties, and purchase new property
even if they require it to avoid the stamp duty. According to him, an annual land tax is more
feasible, as the prospective buyers would not have to invest extra amount along with the housing
price, rather they could pay that equivalent amount of money over the next 15 years as a tax.
Moreover, the land tax should be applied on progressive rate, which will be beneficial for
farmers and first home buyers. The existing home owners, who already paid stamp duty during
their property purchase would also be exempted from the land tax to create a parity in the
economy (Irvine, 2020).
On the other hand, stamp duty is a big revenue source for the Australian government,
although it creates a high volatility in the housing market through sharp rise and fall in the
property values and transactions. Thus, it can be said that to establish a balance and stability in
the housing market, stamp duty should be abolished.
Conclusion
It can be concluded from the above discussion that FHOG and FHP have been beneficial
for the first home owners in the short run, however, due to this subsidy, the prices in the housing
market remained high due to lower supply than the demand level in the market. The stamp duty

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is another barrier that creates volatility and instability in the market by creating additional burden
on the prospective home buyers.
References
Irvine, J. (2020). 'It’s just a bad tax': former Treasury heads unite to slam stamp duty. The
Sydney Morning Herald. Retrieved 6 April 2020, from
https://www.smh.com.au/politics/federal/it-s-just-a-bad-tax-former-treasury-heads-unite-
to-slam-stamp-duty-20200216-p541aq.html.
Lee, W., Naito, T., & Lee, K. D. (2017). Effects of Mixed Oligopoly and Emission Taxes on the
Market and Environment. Korean Economic Review, 33, 267-294.
Mousina, D. (2020). Econosights: Australian housing issues – the supply/demand balance,
outlook for prices and the role for government. AMP Capital. Retrieved 6 April 2020,
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australian-housing-issues.
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Qld.gov.au. (2020). Differences between first home concessions and First Home Owners' Grant.
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Wong, S. K., Li, L., & Monkkonen, P. (2019). How do Developers Price New Housing in a
Highly Oligopolistic City?. International Real Estate Review, 22(3), 309-333.
Zainal, R., Ramli, F., Manap, N., Ali, M., Kasim, N., Noh, H. M., & Musa, S. M. S. (2019).
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