Buying a home has never felt so out of reach for first-home buyers. But if you think a boost to the first-home owner grant will help you out then you should think again.

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness.”

The beginning of Charles Dickens’ classic A Tale of Two Cities appears a particularly apt description of Australia’s housing market. On one hand we have home owners and investors receiving high returns on capital gains and rents but on the other hand many prospective first-home buyers have given up the dream of owning their own home.

Data from the Australian Bureau of Statistics show that first-home buyer activity has never been slower in Australia’s three largest states. In New South Wales, first-home buyers accounted for just 7.2% of all loan applications in September on a seasonally-adjusted basis; well below the post-1999 average of 22.5%. The situation is not much better in Victoria (14.4%) or Queensland (11.5%). Nationally the share was at its lowest level in the series’ 22-year history.

With first-home buyers priced out of the market, housing affordability will become an increasingly hot topic for governments at the federal and state levels. Historically, this has always meant an increase to the first-home owner grant.

Earlier this week Tasmanian Premier Lara Giddings announced a doubling of Tasmania’s first-home owner grant to $30,000, or around 10% of the median dwelling price in Hobart. In Western Australia, the state government has increased the first-home owner grant for purchasing or constructing new homes, although they also reduced the first-home owner grant for purchasing established homes. The current trend for first-home owner grant is to direct first-home buyers towards new homes rather than established ones but that may change if first-home buyers continue to be cautious.

Unfortunately the first-home owner grant does not work. It is one of Australia’s greatest rorts. Rather than improve housing affordability, the benefits of the first-home owner grant accrue directly towards home owners and investors. Effectively it is a government mandated wealth redistribution vehicle that benefits the middle and upper-class.

A boost to the first-home owner grant does increase lending activity, with first-home buyers — rather than waiting — bringing forth their demand to take advantage of the higher grant before it is unwound. This is a good thing for the property industry but rarely works out so well for the first-home buyer.

The extra first-home buyer demand clashes with limited housing supply to drive up prices and reduce the realised benefit of the first-home owner grant. When the extra grant is unwound, first-home buyer demand is left depleted and non-first-home buyer demand tends to fall with it. The policy contributes to dwelling price volatility, a quick rise while it is in place followed by slow growth or falling prices after it is removed.

We saw this in full force during 2009 and 2010. First-home buyers were effectively tricked into entering the market due to unprecedented piles of free cash. After the boost was removed they found that the property they had always dreamed of was not worth what they thought it was.

If state and federal governments want to address housing affordability they should do so with a critical eye towards the middle and upper-class welfare that constitutes Australian housing policy. The Grattan Institute, in its recent Renovating Housing Policy report, found that owner-occupiers and investors received over 90% of government funding directed towards the housing market. Perhaps more importantly it found that these policies did nothing to increase home ownership rates.

Housing affordability for first-home buyers needs to be addressed but a fresh approach is required. Changes to the first-home owner grant will do nothing to improve housing affordability and readers should remember this when state and federal governments try to fool them otherwise.

*This article was originally published at Business Spectator