The First Home Owners' Grant (FHOG), according to its official website, "was introduced on 1 July 2000 to offset the effect of the GST on home ownership".
If the stated purpose were genuine, the grant would have been payable whenever unreclaimed GST was payable; that is, the grant would have been payable to both first-time buyers and repeat buyers, and for both owner-occupation and investment, but only for new homes (meaning homes being sold to consumers for the first time). This would have stopped the GST from reducing the rate at which new homes came onto the market, and thus prevented any supply-side effect on prices and rents of established homes (sales of which did not attract GST).
But in fact the grant was not available to all buyers of new homes, but only to first-time buyers, and therefore did not fully compensate suppliers for the GST. So construction fell and supply tightened, raising the prices and rents of all homes - not just those on which GST was payable.
Furthermore, as the grant was available to all first-time buyers even if they bought established homes, it further raised prices on the demand side. So not only did sellers gain at the expense of taxpayers (wherefore Steve Keen refers to the FHOG as the First Home Vendors' Grant), but also landlords gained at the expense of tenants - all on the pretext of helping first-time buyers!
Prospective buyers understood the inadequacy of the compensation. As buyers rushed to "beat the GST", construction commencements peaked in the first half of 2000 and fell off a cliff in the second half, with flow-on effects on the rest of the economy: GDP was sluggish in the 3rd quarter of 2000 and contracted 0.9 per cent in the 4th quarter. The contraction, initially estimated as 0.6 per cent, was announced by the ABS on March 7, 2001, so that if any action was needed to prevent a second consecutive quarterly contraction (a technical recession), the government had only the rest of the month to do it.
Two days later, the government announced the immediate availability of the Commonwealth Additional Grant (CAG). This was a temporary supplement to the FHOG and was available only for new homes (meaning homes that had not yet been occupied). Thus it encouraged construction - which, unlike mere turnover of the existing housing stock, contributes to GDP. Next weekend the crowds returned to new-home displays. A technical recession was averted.
Policies that encourage construction increase the supply of housing and improve affordability. After the emergency of March 2001 had passed, the government, had it been concerned with housing affordability rather than with propping up prices and rents for incumbent owners, would have phased out the original FHOG and kept the CAG. It did the opposite.
Thus was established a double-barrel precedent: the Commonwealth could offer a grant solely for newly-built homes as part of a temporary stimulus package, but not as part of a long-term housing-affordability policy; but it could hand out taxpayers' money to support property values in the long term, provided that the money passed through the hands of first home buyers.
The precedent was followed by the present government, whose First Home Owners' Boost was not part of its housing-affordability policy (which came earlier), but rather a fiscal stimulus in response to the global financial crisis. Like the CAG, the Boost offered $7,000 more for a new home than for an established home ($14,000 for a new home and $7,000 for an established home, whereas the CAG initially offered $7,000 and $0 respectively, all amounts being in addition to the original $7000 FHOG). The Boost was halved on October 1 and is to disappear completely at the end of the year, leaving just the original FHOG, which does not distinguish between new and established homes.
There has been no shortage of advice urging a permanent preference for new homes. Of course the present government probably missed my letter in the Daily Telegraph on September 30, 2003, and could easily ignore my submission to Lindsay Tanner's Razor Gang in March 2008. But it could hardly miss the report of the Senate Select Committee on Housing Affordability (tabled June 16, 2008), which recommended that the government "increase the First Home Owners Grant Scheme for those buying new dwellings and lower it for buyers of existing dwellings" (Recommendation 9.1).
The Housing Industry Association openly favours the same policy and has criticised the last Federal Budget for phasing out discrimination between new and established homes. Before the Budget, HIA chief Ron Silberberg said more than once that if the Boost was to be cut back, this should be done by restricting the whole $14,000 to new homes.
ACOSS would go further, restricting the entire subsidy to new homes. Even the Property Council of Australia, in an early press release on the Boost, and in its end-of-year round-up and 2009 Budget submission, supported the preference for new homes.