Illustration: Simon Letch So we're left wondering whether our politicians pursue their counterproductive solutions in ignorance of their econocrats' knowledge, or whether the pollies fully understand they're making things worse for first home buyers, but don't care because they also know the punters won't realise they've been conned. Why do such a thing? Because the pollies know – thanks to their econocrats' advice – that the actual beneficiaries of the things they do in the name of improving affordability are people who already own a home. And that's a much larger group of voters than the group of would-be home owners. Scott Morrison advises that the budget in May will have a "housing affordability package" at its centre. Fine. We'll see then how much it does to help or hinder first home buyers.

The grant gives first home buyers a $20,000 leg-up until the end of June. Credit:Louie Douvis This is a tacit admission that home affordability has become too hot politically for the government to get away with merely repeating that the obvious solution is to increase the supply of new homes – which just happens to be the primary responsibility of the states, not the feds. It's true that house prices rise when the demand for them grows faster than their supply is growing. But to imply that the problem can be solved simply by building more homes is to reveal your ignorance of how the housing market works. Homes aren't a simple consumer good to be bought and soon used up. They're a long-lived asset, one that delivers a flow of service over many years – shelter – while retaining – and, everyone hopes, increasing – their resale value. This means there's a huge stock of existing homes, the number of which is increased only a per cent or two by each year's building of new homes.

It means, too, that the demand for home ownership is driven not just by people's desire to own the home they live in, but also by their desire to invest in an asset whose value is expected to appreciate. But if you already own a home, why stop at one? Why not invest in a few of them – especially if such investments are made more attractive by tax breaks such as negative gearing and the 50 per cent discount on the tax on capital gains? Homes – units as well as houses – come in all shapes and sizes. Not to mention widely differing locations. One thing this means is that merely building a lot more houses on the outskirts of the city will do little to satisfy the demand of people fighting over the limited supply of homes close to the centre of the city (where most of the good jobs are). Sensible thinking about housing affordability is plagued by the "fallacy of composition" – the misplaced assumption that what works for the individual must work for everyone.

Take the Victorian government's decision to help first home buyers by reducing or removing the stamp duty they pay. The individual couple hears this and thinks this will make it easier to afford a first home. Sorry, it won't. Why not? Because all first home buyers will get the same help, thus robbing the individual of any advantage over the other people competing for the place they're after. All such attempts to make homes more affordable to first home buyers by supposedly lowering the cost of homes backfire. Because demand continues to exceed supply, what happens is that competing buyers use their tax concession to bid the price of first homes even higher. So the supposed benefit to first home buyers ends up in the hands of those existing home owners who sell them their home, then move on to another. But this doesn't diminish the concession's cost to the state's budget. When the Howard government introduced the 50 per cent discount on the tax on capital gains in 1999 and made it available to people with negatively geared property investments, it could argue that, by making property investment more attractive, it would increase the supply of homes.