Those who thought that the gradual reduction in the first home-owner’s grant in September would cool the first home-buyer market have, for the time being, been proved mistaken.
The Financial Review reported that despite the federal largesse being halved, young buyers continue to flock to the market. In Victoria alone, more than 49,000 grants have were provided in the year to November — a rise of 46% on 2008 (which itself was 28% above 2007). The figures in NSW are equally startling, with more than 66,000 first home-owner’s grants being given — up 67% from 2008.
While the federal government is phasing out its “boosted” grant (reducing it to $10,500 and then $7000 next year for established homes), its stupidity is being replaced in part by eager state governments, happy to fill the breach to ensure that young home buyers are saddled with massive debt burdens after acquiring their first property. Federally, for new properties, the grant was reduced from $21,000 to $14,000 in September, before dropping to $7000 on 1 January 2010.
However, in Victoria buyers are able to receive a further $2000 for established properties, $11,000 for newly constructed homes and a further $4500 for new homes outside the metropolitan area. NSW has its own (slightly less generous) scheme, which provides a $3000 grant and discounted stamp duty.
In Victoria, therefore, the buyer of a newly constructed rural home who is utilising a loan-to-valuation ratio of 90% would be able to increase their purchase price by more than $250,000 (depending on a few other factors such as income levels). The additional purchasing power for established properties is less, but still substantial. NSW buyers will receive about $100,000 more in buying power using a 90% LVR and the various grants.
As this column noted in October 2008 — the time the FHOG was increased, any boost would be utterly useless to actual home buyers. In fact, the boost would be detrimental — serving to “bid up” the price of homes and force buyers to assume greater debt burdens (the boost was aptly named the First Home Vendor’s Grant by Steve Keen). Former ANZ economist Saul Eslake told the AFR that “money poured into the pockets of buyers looking for existing home was wasted and served only to increase prices in the established housing market.”
Eslake, however, claimed that the grant for new homes had more value, noting “given the continual problem with Australia is a lack of supply, anything that brings forward supply is prima facie a good outcome”.
We would suggest improving property developers profit margins (which is essentially what the grant on new homes achieves) may lead to increased supply, but for the wrong reasons. A preferable way to increase supply would be to reduce zoning limits applied by many local councils (the number of units able to be built has been substantially lessened in recent years). Giving a Keynesian-style stimulus to a certain sector will provide short-term benefits, but as with the cash-for-clunkers program in the United States, the effect will be reduced to almost zero as soon as the stimulus ends.
None of this appears to be bothering Victorian treasurer John Lenders though. Lenders told the Financial Review that “Victorian are still buying first homes in record numbers even after the federal government wound down the extra boost”. Lenders probably should have added that thanks to state government policy, young families are assuming more debt than ever before with interest rates and unemployment at historical lows.
Momentum. The rate of price increase appears to have a life of its own. Prices barely paused during the crisis and then actually accelerated.
Prices of course are just prices, they have neither life nor momentum. Young people see the property price boom as an unstoppable juggernaut which took on even the “biggest financial crisis since the Great Depression” and won, which they must jump on or be left behind.
They are not buying out of faith in fair value. They are buying out of fear that the quality of home they can afford has already diminished while they were filling out their forms, and will continue to diminish faster than they can advance their career earning power or save a deposit.
Most of the measures by which Rudd and Swan achieved this relentless hyperinflation (apart from the obvious first home owners’ grant) were subtle, largely unnoticed, hard to explain in a single sentence. So most people don’t see an artificially turbocharged bubble, they just see an unstoppable juggernaut boom, and they respond rationally.
You are right James, it’s very hard to put it all in one sentence, and very few people can see beyond the veil.
Prices are prices, but even much of this is hyped with no valid reason across the board. If the punters would do their home-work and pay attention to sales-history in greater detail, I am sure they would n’t be fooled into paying the bogus and corruptly hyped prices set by the industry.
The industry would argue prices are set by the market but that’s just more industry bullshit because the sales history in certain areas can’t justify the asking prices.
BTW…are those Sydney girls still insisting on home ownership before conjugal rights are accepted?..hahahahehehe