Guest Post: FHOG: Proudly Ripping Off Young Aussies since 2000

Sam Birmingham runs a top quality networking site for young professionals called WeBe, which provides up-to-date information on financial matters, work-related issues, lifestyle news and reviews, and current affairs and opinion pieces. WeBe also provides a platform where members can have their voices heard, express opinions and share ideas with other like-minded Young Professionals.

With the last week’s Mortgage Choice data indicating rising levels of housing stress, Andrew Robb’s criticism of the FHOB, and the building approval numbers falling off a cliff yesterday, Sam has published a great article on WeBe warning that the Government might soon launch another FHOB-esque program to try reflate the Australian housing bubble. Sam’s article is reproduced below for your reading pleasure.


When does free money end up costing you dearly?

When the Government gives it to you and every other prospective First Home Owner under the guise of improving housing affordability.

Last week, a Mortgage Choice survey revealed that ten percent of Australians who bought their first home in the past two years have already sold up, unable to cope with the financial stress of rising interest rates.

Sure, they must have expected rates to rise from GFC-induced lows, but how prudent was it of the Government to lure 246,000 inexperienced buyers into what was already an expensive property market with the promise of up to $21,000 of “no strings attached” cash, otherwise known as the First Home Owner Boost (FHOB)?

Unsurprisingly, Opposition Finance Spokesman Andrew Robb jumped on the Mortgage Choice data to accuse Labor of “betraying” those first home buyer “suckers” who fell for the FHOB trap. A fair point, perhaps, albeit that his criticisms would have more credibility were he not a member of the party that introduced the First Home Owner Grant back in 2000 (ostensibly to offset rising costs associated with the introduction of the GST), spiking a decade of sky-rocketing prices which put housing even further out of reach for young Australians.

Improving Affordability? Or Lining Government Coffers And Investors’ Pockets?

Since its inception, the pretense of the First Home Owner Grant was to give aspiring home owners a “leg up”, helping them to “get a foot on the property ladder” by providing an additional $7,000 (or $14,000 or $21,000) towards their deposit.

When Keating introduced a first home owner program in 1988, prices jumped by almost 30% – the scheme was promptly withdrawn two years later. John Howard re-introduced it in 2000, spiking prices by 16.5% the following year.

Since then, house prices have almost trebled, with the only noticeable slowdown coming in the early stages of the GFC, before that trend was quickly reversed thanks to the Rudd Government’s First Home Owner Boost. This precipitated a year-on-year price rise of 19%, despite Australia facing the Global Financial Crisis, which KRudd so eloquently described as an event “of a truly seismic significance” which required governments to “save capitalism from itself”.

Remind me again, just how we did that, Kevin? By lining the pockets of young Australians with free money, encouraging them leverage to their new-found “wealth” five or ten times over until *hey presto* their buying power was tens (if not hundreds) of thousands of dollars higher, enabling them to merrily bid up the price of every house in the sub-$500k bracket?

Does all this sound like it improved affordability over the past decade? Not likely… 

Why? Because these schemes are a classic example of the Prisoner’s Dilemma.

Sure, if I was the only one receiving an additional $7,000 towards my deposit, that would improve my purchasing power relative to the rest of the market. But when you provide the same incentive to hundreds of thousands of buyers who are competing in the same segment of the market, they are stuck with a lose-lose proposition:

  1. Do I take advantage of the grant, borrow more money to compete with my fellow-FHOs, bid up prices even further, get a foot on the property ladder, then hope prices keep rising?
  2. Or do I sit on the sidelines while everyone else jumps in, watch prices soar ever higher and pray that, eventually, the market will correct and I will be able to afford to put a roof over my head?

No surprises, then, that the average first home loan has ballooned from just over $125,000 back in 2000, to around $300,000 today.

Now ask yourself, where does the money come from? The answer is obvious: Banks, who have made billions importing the vast sums of wholesale debt required to feed this hungry beast.

Next question, where does the money go? At the market-wide level, it boosts Government coffers, thanks to higher stamp duty, land tax and CGT revenues; and at the transaction level, it flows straight into vendors’ pockets – this explains why prominent housing bear, Steve Keen, labels the scheme the First Home Vendors Grant

The Sky Is Falling… Now What?

Finally, the tide seems to be turning – buyers have vanished, unsold stock is piling up, prices are falling, building approvals have plunged off a cliff and international commentators such as The Economist are warning that our market is still over-valued by 56%.

Yes, all this is bad news for Australia’s property speculators and our debt-driven economy. But the flip-side of falling prices is that, after a 20+ year boom propped up by a range of demand-stimulating Government policies, housing is becoming more affordable (or should that be less unaffordable?)

How will the Government react? Sadly, I fear that Julia & Wayne will resort to their old bag of tricks… How long until we see another First Home Owner Boost-esque program? After all, no one wants the bubble to burst on their watch – especially when Australians are drowning in debt like never before – why not just “kick the can” a little further down the road and let someone else clean up the mess in a few years time?

At some point our political leaders need to have the courage to say enough is enough… We cannot continue to transfer the burden of weak decision-making onto future generations.

  • We dig up our natural resources, ship them overseas and spend the proceeds now, rather than preserving the nation’s prosperity in a Sovereign Wealth Fund.
  • For years we have under-invested in infrastructure, hence the bottlenecks at our ports, roads and rail network.
  • The GFC stimulus program saw the Government blow whatever savings we had, leaving us with billions of dollars of debt for future taxpayers to pay off.
  • For decades we have careered down the cheap fossil fuel path, without planning (let alone budgeting) for the transition to a low-carbon economy… Can you guess who will be picking up that tab?
  • And don’t even get me started on the oncoming demographic tsunami, as Baby Boomers retire and a smaller tax base is left to pay for their presently-unfunded healthcare and pension programs.

Rather than taking the FHOB low-road (again), here are three sound policies that would actually address housing affordability:

  1. Get rid of ridiculous demand-stimulating tax concessions like negative gearing, which costs taxpayers $3b+ per annum, or at the very least restrict it to investments that actually add to the nation’s productive capacity (ie. new homes); a public subsidy for a public good.
  2. Scrap stamp duty: It does nothing but skew people’s decision-making towards allocatively inefficient outcomes.
  3. Replace stamp duty with a broad-based land tax, which better aligns Government revenues with annual expenditure on essential services like health, education and police.

Now, who wants to wager how long I will be waiting before a Government works up the courage to take that path…?

UE – I couldn’t agree more Sam. Only, I’d add a complete overhaul of Australia’s restrictive urban planning system into the policy reform bucket in order to increase the responsiveness of housing supply to demand, improve housing affordability, and lessen the chances of volatile boom/bust price cycles. 

Unconventional Economist
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  1. Hi Sam/Leith, interesting article. I tend to agree with the idea of gradually phasing out negative gearing (although rents would spike, at least temporarily) and also removing stamp duty.

    You may be interested in some research we’re doing on the Zetaboards property forum into the leading and lagging indicators for house prices. You can see a list of the indicators that we have come up with so far here…

    Australian Housing Market – Leading and Lagging Indicators

    Building approvals and stock on the market (both of which you mention in your article) are two of the indicators, and we have identified many others. We also note the strong correlation between house price growth and auction clearance rates (a leading or ‘real time’ indicator).

    Anyway, it is work in progress. Ultimately we hope to gather historical data for all these indicators, weight each one somehow, combine them, and then overlay them with a chart for actual house price growth. Then we should be able to see if there is a leading correlation between the indicators and house price growth, from which it may be possible to estimate future growth (maybe 3-6 months ahead) based on current indicators.



    • “although rents would spike, at least temporarily”

      Except for the scrambling investors losing their govt hand out now desperate to get a tenant; and,

      The plethora of empty apartments from SA to Nth Qld.

      I even asked an investor today with a few million in IPs on the sunny coast. He confirmed that without the govt subsidy he would sweat on empty properties and slash rents to get an income on his invsetment.

      • Freddie Goethe

        If that investor is relying on govt subsidy, ie negative gearing, for properties he leaves empty he is probably committing fraud unless they are available for rent at current market rates.

  2. As a reasonably intelligent 30 something stockboker who spent all his 20’s abroad, to come back to Aust a few years back and be greeted with the smug smiles of brand new 30 something mortgage payers and first time home buyers like I’m the idiot… this article, on an up’n’coming networking site … after they’ve all gone balls deep… because it’s different here, is just hilarious. Love your work.

  3. “rather than preserving the nation’s prosperity in a Sovereign Wealth Fund.”

    Fat lot of good it did last time. The so called Sovereign ‘Wealth’ Fund under Howard got blown on crappy US mortgage paper.

    For those who bother to look, the foreign exchange ‘assets’ of the RBA took a sharp detour downwards from September 2007. This was the market value of the garbage the Australian government ‘invested’ its ‘surplus’ in going to zero.

    Only a massive dose of good old inflation by the Fed saved a complete f*@k up.

  4. Leith
    The gap exists for a new political party that has the interests of singles, childless couples and economically literate people with a policy platform that says no to FHOG, FHOB or any other variation, progressively scales back stamp duty, develops an exit strategy from negative gearing, and pushes for a fair return for taxpayers on our finite natural resources. Neither of the major political parties are interested, and the Greens have no economic credibility. As much as I’d look to think this could be achieved as a grassroots movement (where are the mass protests on parliament against stamp duty? is economic vandalism that different from political corruption?), its more likely to need someone fairly high profile to lead such a party and be able to gain sufficient media time and probably have a bit of dough themselves given that donations are unlikely to be flowing from the real estate industry.

    Surely there are enough like minded people spurred by demographic change to mean this shouldn’t be a pipe dream.

    • I agree Michael, but unfortunately the “target” audience are ignorant and apathetic about the situation.

      i.e they don’t know and they don’t care enough to do anything.

      Unfortunately, the major parties have discovered that by creating categories like a “working family” or an “Aussie battler” or a “pensioner” (i.e not a working couple with no kids – or with kids but earn too much to be “working”, or a selfish self-funded retiree who actually saved for a rainy day) – and then providing them with the largesse and profilgate welfare spending and tax transfers they can retain power (or share it ala Greens/Labor) for a very long time.

      Makes it near impossible to raise a third party that wants to: yep, get rid of most tax transfers (including FHOG) introduce a MRRT (i.e no more $40K jet skis for the bogans) raise interest rates to real levels so savers and investors actually can make money without speculating (i.e around 10-12% but that means no more 95% LVR loans, which means a crashing of the property bubble)

      • Great comment The Prince.

        The one extra thing I would like is for the bastards to stop taxing my inflation. By that I mean when the bank gives me a pathetic 6ish % on my money the government taxes me on this six percent. Unfortunately however the value of the money has gone up by nowhere near this much due to inflation the tax eats up any profit.

    • MC, your idea has merit.
      My first thought was to create not a new party but say put up an Independant.
      I know little about the current crop but then I thought of Steve Keen.

      I would vote for him on a single platform of housing/debt reforms – but then again, who would wish the life of a politican on anyone. Most enter politics for the right reasons but then seem to get corrupted by the environment or give up when hounded by the media – whether that be for poor behaviour or for trying to make the system work to the whole communities benefit. Anyway, I live in hope.

    • I would like to think that there is enough momentum for a new political party too, although I reckon we might have to wait at least one more election.

      The Greens have proven that it is possible for a single issue party to build traction, although (i) it is a slow process; (ii) you need Labor/Liberal to dead-heat if you want to actually have a voice; and (iii) it can be tough to take the step from single issue to developing decent policies across the board (see the Greens on anything to do with economics, for example).

      You are right that demographic change could provide the spark — just need a few more frustrated Gen Y’s on the electoral roll before they can combine with X’ers and stick it up their Boomer parents

  5. Very good. Its a dud policy but I do believe Sam has got the title somewhat wrong. It’s Mega Mortgage Mugs, financing land baron retirement plans since 2000.

  6. There are only 3 types of sovereign wealth worth investing in, fixing bottlenecks in the short term, productivity improvements in the medium and education in the long

    There is no investment that holds it’s value like education, but instead of providing education to citizens to allow our economy to be a long term performer, the price of education continues to grow, and we waste sovereign wealth on crappy investments.

    I often ponder why Australia does not capitalize on it’s good fortune, countries with no natural resources became economic powerhouses by creating an entire population of knowledge workers. Just because we can make money from digging holes, does not mean we shouldn’t be trying to do the same. 

    Probably a bit late now though, I just saw kohler on the abc news notifying the sheeple that consumer spending is out of whack with wages growth for the first time in years because they have all become savers. He did neglect to tell them what it means when an economy of debt bingers suddenly become savers, but I guess they will all find out soon enough.

    Ho hum down we go!

    • I agree with the set up of another Sovereign Wealth Fund(s). Firstly, perhaps we should be studying countries that have economies that generate positive Current Account Balances – you know the principle ‘running at a profit’.

      Aus is resource rich, but rather than sell its own minerals/gas, Aus politicans have taken the path of least resistance and given away its resources in return for royalties, minimal company tax and PAYE taxes from miners. Most of the original wealth ends up offshore in foreign shareholders hands.

      Some countries are not so dumb. That group of countries can be seen at the top of this list:

      Australia, the country that pinned its economic future on selling houses to each other for a profit, is understandably near the bottom of the list. If the list adjusted for population we would probably be at the bottom.

    • I agree with your comments re. fixing bottlenecks, increasing productivity and investing in education, BM.

      However, I still believe that there is scope for a SWF that (a) is independent of Govt, so that their greasy paws can’t go near the $$; and (b) sets aside some of the nation’s wealth for our future generations, who, let’s be honest, aren’t going to be able to rely on digging rocks out of the ground to get by.

  7. Oh .. Ps great site for younger folks by the way. Nice to see that the government hasn’t yet managed to kill off educated youth

  8. Good points on getting rid of stamp duty and bringing in a land tax, etc. Of course all of this was in the Henry review, which was met with a deafening silence…

    • At least we have the tax summit to put it back on the agenda…..

      “Prime Minister Julia Gillard promised to hold the summit, to discuss the Henry tax review in depth, by June 30 [2011]as part of a deal she made with crossbenchers…….

      Treasury Secretary Ken Henry, and author of the review, said…..
      “I think that the prime minister has indicated that the summit is likely to be in the second half of this year,” he told a Senate estimates hearing.
      Liberal senator Mathias Cormann said it had been reported to him that Treasurer Wayne Swan had made some comments to Melbourne business people that it was definitely not going to be by June 30, and could even be next year.”

      A broader tax discussion is just not going to happen before another election. One of the consequences of allocating scarce parliamentary ‘tax’ capital to carbon.

      Not to mention scarce Treasury resources. Some of you bloggers should volunteer to work there for 6 months. Might not be long before the Australian Government qualifies for assistance under AusAID.

      • MySideBiased, that is amusing.
        I would like to work for Treasury (from home of course). In my own mind I would be qualified to re-write policies relating to housing.

        Negative gearing for second-hand homes – goneski;
        Interest-only loans for residential RE – goneski;
        50% discount of CGT (yet 100% costs deductible) – goneski;
        Allowing banks to use LVR over 80% – goneski;
        Banks using EquityMate Loans for residential RE – goneski, etc

    • Spot on re. Henry’s recommendations being met with deafening silence, Mr Apple.

      Perhaps the good people at Treasury would like to take me on for six months, as per MySideBiased’s suggestion… I could complete a review of the Henry proposals in a matter of hours — to work out which ones were actually GOOD policy, simply identify those that were met with either stoney silence or lobbying by vested interests. Proceed with those as per Ken’s recommendations and we would have some pretty decent reform on our hands!

      What to do with everything else? In the words of @debtlandian: Goneski!

  9. Virgin Sacrifices.

    The debt gods are angry. We need virgin sacrifices to appease the debt gods.

    The high priests of debt can then rip their hearts out on the alter of interest rates.

    Voodoo economics and virgin sacrifices-something wicked this way cometh.

    History might not repeat but it certainly rhymes.

  10. Interesting post. Canada has allowed significantly higher home ownership rates by insuring high ratio loans. The effect has turned out to be the same as what Australia has experienced: higher debt loads and higher prices.

  11. Excellent piece, Sam.

    But I can’t agree, even though I do think there is political scope for another FHOG. Just not yet.

    It’s only 18 months since the conclusion of the last one and we are still clearly giving back the demand that was pulled forward then.

    Also, it makes little economic sense to inject fiscal stimulus into the RBA’s “mildly restrictive” monetary policy.

    Both of the previous FHOG’s were offered in periods of easing monetary policy.

    If housing really starts to tank (possible), and the RBA to cut, then all bet’s are off.

    But I still favour the slow grind lower in nominal prices and faster in real.

    Until the China shock. Which is most definitely when FHOG III will rear its ugly head.

    • Fair point, H&H

      I would suggest that there is ALWAYS political scope for FHOG and associated boosts – young, naive kids think they’re getting money for jam + older voters enjoy the ensuing capital gains… But popularity does not necessarily maketh good policy, as we all know.

      As much as I would like to see the market tank (I’m a shallow “I told you so” kind of guy, after all), I wholeheartedly agree that the slow decline of nominal prices until real prices get back to some semblance of normality would be a better outcome – if for no other reason than my friends who have been suckered into this chumps market wouldn’t lose everything that they’ve got.

      Agree that China shock would see FHOB2 rolled out quick smart, although I wonder whether it will be as effective next time? After all, the huge volumes of consumption brought forward by FHOB1 has still got to work its way through the system (as you pointed out) PLUS any decline in China would likely make it very hards for our banks to keeping importing bulk wholesale debt — if they can’t get their hands on that cheaper, then they may not have scope to lend the crazy dollars required to get enough FHO’s in to prop up the market

      • Spot on Sam.

        Last FHOB cost $2.5B, which is 2xGDP. What’s the cost of recovery next time round considering FHB average loans increased by 30% in the last tranche?

        How many more times can you implement the policy and where do you draw the line prior to becoming a 100% housing related budget?! I suspect international bondholders might draw the line for us.

        • Actually getting my $B and $T confused here. Try 0.2% of GDP….chickenfeed, until you realise you could build 3 new capital city hospitals with the same funds!

  12. Transitioning to “low carbon economy” is the fastest way to destroy an economy since the cheapest form energy (coal) is an essential raw material for all industries. Even if there was a problem with CO2 (which there clearly isn’t) then adaptation is the only option. Under the best case scenario mitigation wastes 96c in the dollar!

    • Depending on their beliefs, one might respond that relying on the cheapest form on energy (coal) might also be the fastest way to destroy an environment, @Rob JM.

      I don’t profess to understand all the science, but I try to be reasonably pragmatic about the whole climate change debate and reckon that a low carbon economy is inevitable for a range of reasons:
      (i) Risk Management: What IF the worst predictions are right? the consequences would be so catastrophic that surely we ought to at least mitigate our risk somewhat.
      (i) Global Consensus: If the majority of nations ever reach agreement on pricing carbon then will have to go along with it, whether we like it or not; and
      (iii) Finite Resources: Bottom line, we rely on cheap energy (as you point out) to power of homes, cars, etc BUT all those energy sources (coal, oil, gas) are, at the end of the day, finite resources… When they are all gone we will obviously have a NO carbon economy, so why not at least try to minimise our reliance sooner rather than later?

      Going back to what I said in the article, the key point is that transitioning to a low carbon economy (whether you agree with it or not) has a significant cost. Past and present generations of taxpayers have barely contributed a ZACK towards the change, so guess who will be paying for it? Yep, future generations, as per usual.

  13. It’s good to see the 20 and 30 somethings making a stand against the political insanity of these baby boom politicians who enjoyed a free education and housing at 3 x income. With there voting numbers growing, I don’t think change is far away.

  14. I agree that FHOB is well a joke.

    Can someone please answer how a SWF would preserve Australia’s future?

    I agree that for decades there has been a lack of infrastructure spending in Australia with estimates Australia’s infrastructure deficient ranging from $445 billion to over $770 billion.

    Can someone please answer how we are going to reverse this deficit?

    Can someone please answer exactly how much public savings Australia had prior to the GFC? From memory I believe net debt peaked at -3.8% of GDP (07-08).

    Can you please explain to me what little public savings Australia had as a % of GDP would mitigate Australia’s exposure to it’s ~330% of GDP housing sector? Close the infrastructure deficit?

    I agree that Australia ultimately should look at your road less traveled policies (Tax treatment of property).

    Question is how dose Australia do this without destroying the economy?

    Whatever policies Australia implements need to be staggered to reduce the risk of destroying the economy.

    I would also argue that Australia needs a sophisticated transparent credit market before we do anything.

    We need bi-partisan policies and I am concerned that the only way I can realistically see this happen is if we see a banking crisis and Malcolm Turnbull back as the leader of the Liberal party.

    Note: I am a young professional who also owns a property who has not taken advantage of any FHOB grant.

    • >>Question is how dose Australia do this without destroying the economy?

      I think of it as ‘changing the economy’ – it wouldnt be hard to improve the inequitable wasteful one we have today. For example when house prices instead of actual business drives so much of an economy I believe it is somewhat destroyed already. Hopefully Steven Keen is right with the crash which should give the impetus for government & the population to look at a sustainable and more equitable economy.

    • Sorry I meant FHOG.

      Please use your imagination on how a sophisticated credit market could mitigate the potential risks and deficits Australia is currently facing.

    • Re SWF: The Norway example seems to have worked pretty well for them. Having said that, I note that Norwegians pay high taxes in order to provide Govt with enough spending money to sustain the high level of services that they enjoy.

      Would Aussie taxpayers money be better invested in infrastructure? I’m not in a position to answer that. Would Aussies taxpayers be willing to pay significantly higher personal tax rates to justify a higher level of service? I doubt it.

      Having said that, though, the other benefit of a SWF (provided it is independent of Govt) would be that it quarantines $$$, keeping money out of politician’s greedy pork-barreling hands!

      RE Getting Rid of Subisidies Without Destroying Economy: I 100% agree that this is our biggest challenge. Sadly, decades of weak, populist decision-making render our economy dependent on ever-increasing property prices and the ever-increasingly volumes of debt required to sustain them.

      Is it better to just take our medicine now and never make the same ponzi mistakes again? To say that would be a tough sell is the understatement of the year.

      Can we stagger policy changes enough to engineer a managed slowdown? It would great if we could, but sadly I don’t that it is possible.

      Let’s be honest, it is going to be an external shock (be it China, GFC2, CAD, wholesale debt, etc) that is our undoing… The big question then will be whether Govts return to the same gutless policies thereafter.

      • PS: Yes, bring back Malcolm!!

        If anyone can get us out of this mess then my money is on him… Sadly the majority of Australians (ie. those to whom Boganomics refers) aren’t smart enough to understand him, nor would they be willing to put up with the “tough love” that would be required.