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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 These already look outdated.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.
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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.