Labor’s plan to combat housing affordability, like most political solutions to an economic problem, will almost certainly be utterly useless. The problem with housing affordability is a simple demand and supply equation – more people are moving to major Australian cities than dwellings are being constructed.

The dilemma is exacerbated by the limited areas of prime housing – only so many people can live in Sydney’s eastern suburbs or Melbourne’s inner-south east. Rudd’s plan does nothing to alter the demand factors (which would involve the drastic and possible harmful reduction in skilled immigrants) or supply factors (allowing higher density development in prime areas).

Instead, like the Howard Government’s economically idiotic first home owner’s grant, Rudd’s solution is to attempt to give first-home owners more money so that they can afford a deposit. The obvious problem with Rudd’s plan is, like the first-home owner’s grant, gifting people money (albeit in the form of reduced taxes on savings) has a direct inflationary effect. A first home owner’s grant of $12,000 doesn’t save the purchaser any money, rather, allows the vendor to receive more when they sell their property.

The less obvious problem with Rudd’s plan is that the superannuation-style savings plan, while nice in theory, is clearly lacking in practice. While savings in the “first home saver account” are taxed at the relatively low rate of only 15%, Labor noted that superannuation earnings were around 8% in “growth style” funds, or 5% in “capital guaranteed funds”.

The problem is, over the long-term, residential property appreciates at an average rate of 10% per year. Therefore, the savings accumulated in the “first home saver account” are unlikely to keep up with the increase in the property market itself. Further, if the property market does dip, the first home savers can’t access the money for four years, so may miss a prime opportunity to buy.

This situation is exacerbated by the fact that investment property owners receive a tax break for losses (negative gearing). So while the poor first home savers are paying 15% tax, wealthy investors are bidding up the prices of property and deducting the interest payments from other income.

Of course the other glaring problem with the entire plan is that low income earners (who earn less than $30,000) pay a marginal rate of 15% anyway – so the entire thing is absolutely useless to those who are in most need.

The solution to Australia’s affordability crisis is simple. Most likely, the politicians already know it. The problem is allowing high-density developments in prime areas would be political suicide – far better to think up a dud economic policy which makes a great sound bite.