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rushing to the shops « Previous | |Next »
October 30, 2008

In The Australian George Megalogenis highlights a key problem with the Rudd Government's economic stimulus package that helps first homeowners into the housing market. He says that the boost to the first-home owner grant has been sold by the Prime Minister as the bargain of a lifetime. For a new house or apartment valued at $400,000, $21,000 would make up a 5 per cent deposit. Megalogenis then adds:

Assuming you planned to buy a year or two from now, when things have calmed down and unemployment had peaked, that $21,000 is meant to change your way of thinking. Why wait two years when your $400,000 dream property may be worth $410,000 when the first-home owner grant returns to $7000 next July? If only it were that simple. Bidding now, in a property market in which prices are at best flat and your job may not be all that secure, is not the smartest thing to do. You can hear the prospective buyer's mind tick over. "Do I risk a capital loss in the short term to get into the market? Or do I wait until I know for sure whether there will be a recession or not?"

A rational investor would hold off buying, especially in Sydney when property prices have been falling for five years. because of the risk that if prices continue to fall, buyers could end up with negative equity - where their mortgage is larger than the value of their home. Or do you take the government's money and the hit on the capital loss and hope that you can afford the repayments? Take the risk of becoming unemployed and overleveraged.

It is a little indication that people won't be spending bigtime in the near future to realize the Australian dream of property or home ownership. Most people who feel out of control of their finances will endeavour to regain control by reining in their spending. Any expense that doesn't directly relate to food, shelter, utilities, debt and education for your children will be eliminated no matter what the advertisements from Harvey Norman and the car industry say about wild and conspicuous consumption. These already look outdated.

Nor will the Reserve Bank's cut in interest rates encourage indebted households to rush to the shops. Nor will the free market economic talk that it's just a blip restore consumer confidence to spend up big at Harvey Norman. The defaults on credit card payments are increasing, credit limits will eventually be reduced for those living in areas of falling house prices or working in troubled industries, and consumers already in debt will be shunned as risky borrowers.

Rudd Labor gives no indication of the debt built around home ownership other than needing to make it more affordable. We rarely hear about household debt that is due to finance capital making finance available to consumers on a mass scale.

| Posted by Gary Sauer-Thompson at 7:45 AM | | Comments (8)
Comments

Comments

Yes, the FHMG is a joke. If it was really intended as a boost for the housing industry it would be limited to new homes but of course that would infringe the bipartisan belief in Australia that welfare is first and foremost an electoral bribe and must therefore be spread around as many people as possible.

If the government truly wanted to stimulate the housing sector it could simply award contracts to build some houses on crown land and then rent them out to low income earners (sorry Kev, make that 'working families') but as we all know, governments have no business owning houses. That's socialism.

Ken,
I'm surprised that there is no talk about public housing from Rudd Labor. It used to be Labor policy, especially in SA. Why the silence now when it is becoming increasingly needed?

Nan they have their complicated scheme that is intended to boost supplies of low cost housing - one that depends on tax breaks to encourage developers to invest. The tax breaks will of course be most attractive to developers who fund their projects with debt so unsurprisingly we've not heard much news about results from that scheme.

As for owning public housing, well I suspect Labor rejects it mainly because it requires capital spending, which in turn means the government borrowing money, which thanks to 11 years of Howard/Costello is a sin to be ranked with treason and incest. Hopefully the financial meltdown will act as a circuit-breaker and let governments start to borrow money again for worthwhile infrastructure projects instead of trying to get them done off balance sheet with fancy private sector deals.

BTW the acronym in my first comment should be 'FHOG'.

Do the RBA's interest rate ups and downs have any bearing on the interest rates on credit cards? I mean bank credit cards, not store cards.

Lyn
The interest charged on most credit card accounts has not been cut — and some have been lifted — since the Reserve Bank lowered interest rates last month.

Slack regulation --an indication that regulation in Australia is not world's best practice.

Gary,
That would appear to be a pretty big hole in the Get 'em Spending equation, would it not? I'd imagine there are a lot of people more worried about paying off credit cards right now than spending dough over Christmas. Kind of defeats the purpose of the handouts, doesn't it?

Lyn,
The banks are pushing refinancing credit card debt into personnel loans now which drastically reduces the rate of interest. The trick is for the people to commit to not taking on a new credit card after wards.

Credit cards really are unnecessary. We have operated without them for 2 years without any visible side effects.

Les,
Credit cards are like financial terrorist attacks. Like a lot of other people, we learned that the hard way. Like you, we won't be doing that again.