The " Buy new " initiative !

Yesterdays New South Wales state budget contained a carefully crafted initiative that could spark a resurgence of the home building industry.     From January 1 2012 the relief from paying stamp duty on homes purchased by first home buyers will apply only to new constructions, including those bought " off the plan ".    First home buyers purchasing existing homes will no longer be exempt from stamp duty.

At present, construction of new homes is at a historically low level.   If this initiative can jump start new building activity it will have a dramatic effect on all sections of the economy.   It is amazing just how many industries are involved in manufacturing the products necessary to construct a new home.    That starts with cement and steel reinforcing for the pad.   Then comes bricks, tiles, metal or timber frames, roof trusses, electrical cable, pipework - and then Gyprock, paint and finishing items.

Each new home also involves the installation of a hot water service, stove, kitchen and bathroom cupboards and fittings - and when it is finished comes carpet and furniture.   All these items cross a spectrum of industries and lead to a buoyant Australian manufacturing sector.

Then - there are the jobs involved.   Constructing a new home is labour intensive.  We still built homes the same way as in the time of the Roman empire - putting one brick on top of another.   If building new homes can be given acceleration the entire economy will show a dramatic improvement.

The new rules will apply to new homes costing up to $ 500,000, with partial relief for those reaching $ 600,000.  First home buyers will still be eligible for that $ 7000 grant, hence relief from stamp duty will still mean closing the gap between deposit and mortgage.

Of course there will be other consequences from this initiative.   Buying an existing home will become less popular for first home buyers and this may bring a drop in asking prices.   At the same time, new home sites are usually way out on the outskirts of cities, far from job opportunities, hence there will be a corresponding need for better public transport - and that is a costly item.

Another unintended consequence could be a dramatic shift in tearing down existing old homes to build new ones.   A new home does not refer only to a free standing dwelling on a quarter acre block of land.  It applies equally to a high rise apartment - and these will also attract stamp duty relief for new buildings.   The economics of tearing down an old home and replacing it with a new one will usually take the final price beyond the reach of first home buyers - hence this new plan will surely create a boom in new high rise apartments - and that has long been the aim of government to consolidate existing suburbs with existing public transport in place.

The change is a bold initiative. and there is every chance that it will deliver spectacular benefits to the economy.   At least it is a move away from the tired thinking that has applied to home building over the past few decades.    We live in difficult times, and it is encouraging to see that a fresh approach is sweeping away the cobwebs in the delivery of this new budget !