The Australian housing market continues to astound, with clearance rates above 80% in Melbourne and median prices nearing $500,000 nationally. However, the prime causes (government meddling in the property market) of the rapidly inflating bubble have become so obvious that even the mainstream media is finally catching on. Recently, Mark Russell writing in the Sunday Age noted that “the paradox of the first-home-owner’s grant is that it makes housing less affordable for the people supposed to benefit”.
Crikey readers will have known that for a while — in fact, since October 28, when the FHOB grant was boosted and this column noted that:
The most obvious problem with the grant is that it doesn’t actually benefit home buyers. Most recipients of the grant will be purchasing lower-end properties, probably in competition with each other.
Giving them extra money will have the effect of “bidding up” the property up by the value of the grant. It is inflation in its purest form. That’s not to say no one benefits from the grant. Those selling their property will receive an extra $14,000. Moreover, by increasing the grant to $21,000 for new properties the government is in effect transferring cash from taxpayers to property developers. (Unsurprisingly, property developers have rushed to applaud Rudd’s move.)
While the media has caught on, still not everyone agrees — unsurprisingly, federal Labor politicians still support the boosted housing stimulus. Labor minister Tanya Plibersek told The Age in August that “the government was pleased with the success of the first home buyers’ grant because ‘a strong housing market is critical for underpinning confidence and supporting jobs in the Australian economy’.”
Aside from the obvious point, that an asset bubble, in any sector, will never be sustainable forever, and leads to inevitable widespread misallocation of savings, Plibersek’s comments are completely wrong on a common-sense basis. High property prices actually prevent developers from undertaking projects due to prohibitively high cost of land preventing developers from earning a reasonable risk-adjusted return. That means less commercial and residential development and less jobs.
However, it is not merely the artificial government stimulus that has spurred the bubble — the major factors underlying the recent price recovery have been a combination of short supply and lax lending policies.
While many believe that banks have tightened lending criteria in recent months, the reality is the Big Four banks are still happy to lend to home buyers on a loan-to-valuation ratio of 95% (with the exception of ANZ, which has marginally tightened to 90%). A loan-to-valuation ratio is another way of stating how much equity the bank requires a purchaser to contribute — for example, an LVR of 95% means that the buyer only requires 5% of the purchase price as a deposit. Therefore, for a young couple who is able to save a mere $30,000 (and can combine that with a $21,000 home-owners grant), earning $75,000 each (not that much more than average weekly wages) would be able to purchase a property for more than $1 million.
The banks, of course, have their own vested interest in maintaining the flow of finance to maintain house prices. If house prices slump, the value of collateral held by the banks will crash, placing their existence in serious doubt. That is because the value of banks’ capital is usually a small fraction of their assets. The inherent riskiness of banks’ operations has been borne out in the United States — since Lehman collapsed one year ago, 109 US banks have folded. (The longer banks can keep the housing boom flowing, the more short-term performance bonuses are paid to senior management. By the time the problems materialise, the cash bonuses have long been paid.)
It is no coincidence that those with the most to lose from a pricking of the housing bubble — the federal government and large banks — have been most instrumental in ensuring property prices remain high. There is also a clear link between the size of the bubble and its duration — the bigger the bubble, the longer it takes to pop. If and when that happens, it will not be pretty.
“Therefore, for a young couple who is able to save a mere $30,000 …..would be able to purchase a property for more than $1 million. ”
well that’s not entirely correct….
Have you forgotten about stamp duty on existing properties? (about $40,000 dollars on a million dollar property in NSW).
Granted they could buy off-the-plan (though someone with a million bucks to spend probably wouldn’t) to avoid this. But then there’s still the Lenders Mortgage Insurance for any purchases over 80% LVR? Another $30,000 right there for the example above.
I mean, this is all a genuine issue, but from my reckoning, you’d need close to $100,000 in cash, including any grants, to get off the ground towards a million dollar property.
Disclaimer: i’m not involved in the real estate profession at all so i could be completely wrong 🙂
MTATS makes some good points, and not to mention the couple’s would need to be able to service a loan of $1 million. Something that I don’t believe they will be able to do on $75,000 each as the after tax income is likely to be too low.
Banks have throttled lending to a certain degree. There is only one lender that I know of at the moment who will write a true 95% loan. The others (banks, as referred to above) will write them but only for existing customers, which again, consolidates their hold on the market.
The first home owners grant is also not able to be used as a deposit by the majors. They require 3 months of genuine savings as well, so the funds cannot be a gift, or from the sale of an asset like a car, as this is unsustainable.
Price rises and this constriction of lending has made it very difficult to purchase a home for first home buyers, many of which I have personally seen give up. However this has taken it’s toll on demand for new dwellings, and total finance written, with both figures recently falling.
I don’t believe we will see significant price falls any time soon though Adam – demand for building services is likely to be taken up by the Government’s stimulus package for some time, taking away labour which would be used to build homes. In fact, approval for dwellings and housing finance have both fallen in recent figures, probably reflecting the bank’s tightened standards. Coupled with the shortfall already apparent, it’s likely to see house prices moderate once the grant falls away, not collapse.
Hoping this post makes it passed the Keeper…Crikey are in the business of moderation these days and I seem to be a prime target….
But, you have consistently been a pointer to the perils awaiting the final outcome of the Australian Housing Market this time around.
Accordingly, no ones blood will be on your head.
It reminds me of the Titanic. The people on board the ship were in disbelief that the ship could actually sink, believing they would be rescued and even the ships band kept playing while the ship was on a 30 degree tilt….the analogy and comparisons are stark.
((((Coupled with the shortfall already apparent, it’s likely to see house prices moderate once the grant falls away, not collapse.)))))
I hope you are right, but on talking with people in the industry they are all saying the majority of activity at the moment is in the 400K-500K range…that would be the FHOG would it not?
So, if there is little activity above this range, then what’s left after the FHOG?
To suggest that investors will pick up the slack is just typical Realestate Industy gobbledegook.
Remember what the FHOG was for? It was to compensate for the effects of the GST on home prices. Odd, isn’t it, that the GST together with the original $7000 across-the-board FHOG had the following net effects on a $300k new or second-hand home (before stamp duty, which varies state to state):
New home: $300,000 + $30,000 – $7000 = 323,000
Old homes: $300,000 – $7000 = $293,000
That’s not all that pushed new home development to rates not seen since the war. Land infrastructure levies, planning approval costs, and associated delays and risks, have added significant premiums, with some estimates going as high as 40 per cent of the total cost of new homes in NSW.
Check out Peter Costello’s response when the Productivity Commission tried to point out how poorly the FHOG was targeted: http://treasurer.gov.au/DisplayDocs.aspx?pageID=010&doc=publications/firsthome.htm&min=phc