Stimulus fallout

My long time readers would know that I was certainly not supportive of the first home buyers grant boost that the government implemented as part of its stimulus packages in response to the GFC. I have previously mentioned my issues with this sort of policy.

  • It is unsustainable
  • It brings forward demand, [so] can therefore artificially push up prices
  • Once the stimulus demand is gone the demand “falls of a cliff” and prices fall
  • People who took on debt to buy and item during the stimulus period can find themselves with more debt that the item is worth, and have trouble offloading the item because there are not many people left who want the item who don’t already have one.

I have previously described the effects of the first home buyers grant boost as a “stimulus driven demand bubble” and you can see the results on the housing market’s churn rate from the Unconventional Economist’s latest post. But as I warned above, once the stimulus ends the churn rate collapses and down come the prices. This obviously leave some unfortunates who took the bait at the height of the price boom in a very difficult position.

The Australian seems to be finally tweaking to the issue with an article over the weekend. Interestingly it also seems to have linked market churn to prices.

The cheapest part of Labor’s 2008-09 stimulus package has come back to bite the economy, with a hole left in the housing market after a record number of first-home buyers brought forward their purchases and forced up prices during the global financial crisis.

Demand from first-time buyers is now at its lowest level in seven years, but the slack has not been picked up by repeat buyers. This breaks the pattern of the previous government-induced first-home buyer boom in 2001, when repeat buyers filled the void at the other end of the stimulus cycle. Labor trebled the first-home owner grant for new homes, and doubled it for existing dwellings as part of the first stimulus package announced in October 2008, at a cost of $1 billion.

The immediate effect of the handout was to encourage people to borrow more. The average size of a loan taken out by a first-home buyer increased by 25 per cent in the year to March 2009, and house prices followed, with the median price jumping 15.5 per cent in the year to the March quarter last year.

This repeated the affordability sting of the previous doubling of the first-home owner grant by the Howard government in March 2001. The average loan size increased by 26 per cent in the year to October 2001, and the median house price rose by 21 per cent in the year to the September quarter 2001.

Labor used the grant to prevent a freefall in house prices during the GFC. Sources at the time said it was a confidence play, aimed at placing a floor under the market. As with much of the stimulus, it worked better than expected, and left Australia with the mixed blessing of another house price surge.

Officials had long understood the first-home owner grant fed straight into prices when it was increased on a temporary basis. But they didn’t anticipate that prices would rise faster during the GFC than they did during the first phase of the mining boom between 2004 and 2007.

Now that the market is flat, and prices are falling, the most recent entrants to mortgageville may feel a little ripped off.

If you take a look at the Brisbane market you can certainly see the possibility that someone who purchased in the last 12 months probably won’t be too chuffed with their timing. The same goes for some of the other Australian capitals, such as Perth and Adelaide as well as other regional areas.

However, I don’t think the market is quite at the stage where anyone who purchased in 2009 would be feeling ripped off. In fact I am sure there are plenty of people that have been able to sell-out, or release equity in the last 12 months that would be feeling quite happy with their purchases during the stimulus boom. But in my opinion the market has further to fall, and in Queensland and WA there certainly is already the potential for First Home Buyers Grant Boost recipients to be holding mortgages near or above the value of their houses. If the market falls further the number of these people will obviously rise.

The other side of this story (not mentioned in the article) is the systemic risk created by debt stimulating policy. The RBA’s financial stability report shows that at the height of stimulus period the Australian banks were issuing 1 in 4 loans to owner occupiers with an LVR above 90%, I assume that many of these were issued using the FHG as the major component of their deposit . As I have mentioned recently the only real reason these people would now be holding lower LVR loans is because of rising prices, created by that same stimulus policy. If the market continues to fall as the effects of that stimulus wear off there is the potential that the Australian banks will be holding large numbers of risky loans on their books at a time when the market is falling.

Obviously the RBA is watching on as it tries to balance the economy between the housing market and Futureboom! dynamics. But I am sure that is little comfort to those already concerned about their financial position when the housing market is falling and the costs of living are increasing. If a continuation of the downward trend in prices suddenly leads to a stampede to the exits then my question about responsibility will no longer be hypothetical.

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Comments

  1. Hi DE,

    The RBA has to spin in order not to spook the markets, but I’ll be amazed if the housing bubble does not really burst by years end, or we see much bigger cracks.

    Sure we’ve see up to -7% drop in Perth, and an alleged +1.2% in Sydney (Ref RPData), but cost of living (not the CPI), but the real cost of living is spiking, lots of cost pressures everywhere, and in amongst all that we’ve got upcoming flood levy, electricity, gas, etc. rises planned. Bring on the Carbon Tax eventually, and no one will loose their job and no industry will be damaged …not. The taxpayer funded part of NBN will hit at some point…any alarm bells yet?

    How can all of the cost pressures not cause new buyers (if there are any) to think twice about jumping in. Many home owners are closer to the edge that any of the data shows IMO judging from my friends who are not badly paid, and multiple income families.

    I’m pretty sure we’re going to see some brisk walking to the exits. Maybe I’m wrong, but that’s the way I see it.

    I see it this way with more conviction given the incompetent government, and it’s one fiscal blunder after the other. How many cattle farms will go up for auction at a bargain price to name a new sector under stress??

  2. Torchwood1979

    I reckon the QLD Government’s new housing stimulus will stop the melt dead in its tracks in Brisbane. I wouldn’t be surprised if the market even shows a positive growth figure for the Sept quarter. The Governments still have guns to fire and they will fire them.

    • Isn’t it for new homes only ? That won’t do anything to support the price of existing dwellings if it is.

      • Yes that’s right. From the ‘tabloid mail’:

        TREASURER Andrew Fraser will announce a $10,000 grant for those building new homes in today’s state budget.

        Mr Fraser this morning tweeted details of the new Queensland Building Boost grant, which will only be available from August 1 this year and Jan 31, 2012.

      • Torchwood1979

        Don’t be naive. If people start rushing to new dwellings and land it’ll have a knock-on effect with the rest of the market. No way is QLD RE going back to boom but I expect this will be enough to stop the slide within a couple of months.

          • Torchwood1979

            Just saw another article mentioning the increased stamp duty. I retract my statement. QLD is well #@[{ed!

  3. That is indeed for new homes ONLY, I doubt it will help the demand for existing homes.

  4. The dilemma for the banks is what to do with the investment property loans. The banks can force a ‘Margin Calls’ when the LVR increases, although doing so will be suicidal. Many investment property loans are only for 5 years, and it’ll be very hard to refinance the loan when the price falls.

    In the ‘nightmare’ scenario, the rating agencies will find a lot of ‘problem loans’ in a small bank where the LVR is out of whack. The small bank will respond by making ‘margin calls’ on the investors, both to please the credit rating agency and also because the mortgage insurance cover don’t go above 100%. That started off a spiral between falling price and margin call, and the contagion spreads to the other banks as well. The banks will ask for a government guarantee once again, the government will relents, but the bank fails anyway. Overnight, our deficit becomes 150% of GDP!!

    Before it gets that bad, I expect the RBA to simply take over the Australian mortgage lending business. They don’t have a ‘cost of money’ beyond how much it takes to print it. Now THAT would be radical.

  5. Ronin, What you mean is that investment loans are 5 years Interest Only. It means the banks might refuse to rollover to a new IO term, meaning they now have to start making repayments, not just scraping the interest costs together. They don’t have to “refinance” every five years.
    Margin calls, certainly could be factor, particularly to sentiment… imagine if this goes mainstream, and PI’s get wind of that factor…

  6. Stimulus fallout: the drug pushers don’t care about the drug user and consequences, only about making a sale. Ditto for government sponsored debt pushers.

    QLD: “I believe there’s no good reason why Queenslanders should have to hand over a staggering $540,000 an hour in interest costs alone.”
    Campbell Newman. http://www.lnp.org.au

    I have been in contact with Campbells office to find out whether he is referring to an 8 hr day or 24/7. Will post.

    To the FHOG recipients welcome to inflationary opium and debt slavery.

    To the soon to retire baby boomers, you will be pumped full of the real stuff, in your state sponsored generic drugs cocktails. Lollygobbleblissbombs.

  7. There’s been quite a few articles now clearly demonstrating the link between housing stimulus payments for first home buyers and house prices. While the Government has wound up the stimulus, I’m starting to wonder whether the proposed carbon price will give it the “excuse” it needs to launch a further round of housing stimulus payments.
    A number of lobby groups have suggested that a carbon price will push up the costs of raw materials for housing and that this will feed into housing prices. My recollection is that this is similar to the argument that the Government used to intorduce the First Home Owners Grant following the GST. Could we see the same thing with the carbon price? I’ll be watching with interest…

  8. I am not against a grant for first home buyers per se because mainly it is important for a Countries long term plan that people are in their own mortgage paid home of their own by the time they are 65. However it is the form of the grant that is important. One of the very good grants (and there were plenty of bad ones) was one in the 1980s where a first home buyer opened a bank account – a five year term if I remember rightly – and for every dollar the first home buyer put in the Government put in another. It seemed to work well.