Labour says National is ramping up home-buyer subsidies against Treasury advice and that a similar move in Australia pushed up prices and helped sellers, not buyers.
Prime Minister John Key yesterday announced the plan at his campaign launch, offering to double to a maximum of $20,000 the subsidy for new homes built by low to middle income KiwiSavers.
But Labour housing spokesman Phil Twyford said the idea was discredited in Australia.
"Documents released under the OIA show Treasury advised the Government that 'experience with home ownership grants in Australia suggests that such programmes tend to push prices up in a supply constrained environment by supporting greater demand, rather than improving affordability."
Treasury went on to say there was a risk that by significantly expanding eligibility for the KiwiSaver Deposit Subsidy and Welcome Home Loan schemes, "the Government will end up undermining affordability for first-home buyers".
A review of the scheme in recommended winding it back, but also found prices did not rise as much as the size of the grant, so it was of some use to first home buyers.
Twyford said it was "Economics 101" that stimulating demand in an already overheated market, where supply was not keeping up with demand, would push up prices.
"As the Australian experience shows and as Treasury knows, the Government is trying to put out a fire with petrol," he said.
National had thrown $218 million on the bonfire of the Auckland housing market.
He said by contrast, Labour's KiwiBuild policy would deliver homes over $200,000 below the median house price in Auckland.
Twyford said the Government considered a more modest scheme, in a draft paper last year, and rejected it.
That would have increased the subsidy from $5000 to $7000 for an individual and from $10,000 to $14,000 for a couple.
National's plan unveiled yesterday would increase the subsidy to $10,000 for an individual and $20,000 for a couple.
However, Housing Minister Nick Smith said Treasury's advice was that increasing the grant for existing houses would push up house prices.
"That's why we did not increase for existing houses ... only new houses."
He said Treasury and the Reserve Bank advised this was "a far smarter way to drive increased supply".
Treasury was not in favour of subsidies, but if they were applied they preferred them to be restricted to new houses.
Officials believed that would most likely change the type of new housing being built towards the lower-cost range.
The Government's concern was that too much new housing was at the higher-cost end, above $700,000, and it wanted to incentivise more lower-cost houses.
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