Governments have a habit of meddling with things. This is largely due to the political imperative of being seen to be doing something to fix economic problems. The downside to this meddling is it that it tends to cause more damage than it solves. Take many of the panicked acts by Australian (and global) authorities during the GFC and the data that continues to emerge.

In 2008, the federal government increased the first home owner’s grant. The intention was presumably to make homes more affordable for first home buyers. The result was the exact opposite. First home buyers used the money to simply “bid up” the price of homes. The underlying value of those properties (which is based on the asset’s cash return, not what someone else is willing to pay or lend) didn’t change, so many (often young) buyers were lured into a lifelong debt trap buying an asset they can’t properly afford.

The real effect of the policy (aside from increasing debt levels and prices) was to bring forward demand. For example, instead of saving for three years to accumulate a deposit and buy a home, young people on lowish incomes were able to buy a property right away using the government grant. Their ultimate purchase decision was not altered, but rather, happened a couple of years earlier than it otherwise would have. As a result of the FHOG, the percentage of housing finance utilised first home buyers almost hit 30%. During the March quarter, that figure slumped to only 15.4%. What that means is that future generations effectively (through taxpayer grants) paid vendors to receive more for their properties.

This column warned of the problems with the FHOG on the day it was announced, way back in October 2008, so the result didn’t come as a surprise.

Meanwhile, ratings agency Fitch reported that delinquencies in the residential mortgage backed securities sector (which is partially funded by taxpayers) hit a record 1.79% in March — an increase of more than 30%.

It doesn’t take too much deep thinking to work out that government policy caused a misallocation of resources into the housing sector. This caused the prices of residential property to boom, and those prices are now starting to fall. This is somewhat of a problem given that most property purchases (especially by first home buyers) are largely funded by debt — which has contractually fixed obligations.

While the most poorly devised scheme, the first home owner’s grant wasn’t the only piece of foolhardy government policy. The federal government also created a policy to help the car industry, by allowing small businesses to claim a 50% tax deduction on new vehicles. This had the effect of businesses purchasing cars they didn’t really yet need, simply to get the tax break. A year after the tax break ended, and the Financial Review reported that sales of SUVs fell by 43% and large cars were down 32% compared with the previous year. In May alone, sales were down 13% from last year.

Of course, Australian authorities were hardly alone in their responses to the financial crisis. The Federal Reserve and US government spent trillions trying to stimulate their way out of recession. The result of their efforts are a monstrous debt (Congress is yet to approve the latest increase to the “debt ceiling”), near 10% unemployment and house prices continuing to fall. In fact, despite two rounds of quantitative easing, the New York Times reported that US house prices are down 33% since 2006, and are currently at the same levels as 2002.

Despite the failings, expect another round of ill-thought out policy when the economy starts to falter again.