Loan pre-approvals by banks can be confusing. They aren't a rubber stamp to buy whatever you want, but some buyers are being a little too cautious.
Herald Sun: First Home Buyers Grant outstays welcome
See Monique's 26th May column in Herald Sun here. Alternatively read on:
First home owner grants: a $22 billion policy failure
Wayne Swan says he’ll do whatever it takes to put the Federal finances back into surplus in 2012/13. Many commentators are naturally sceptical he’s done enough in his recent Budget to achieve this aim. For that matter, not only am I sceptical, I also question why some very obvious cost-cutting hasn’t occurred.
Despite the current austere fiscal times, governments across Australia are still spending around $1 billion a year in grants to first home buyers (FHBs). And in the nearly 12 years since the First Home Owners Grant was established in July 2000, Federal and State Governments across Australia have paid out around $22 billion in concessions to first home buyers.
This $22 billion bill – calculated by extrapolating to an Australian-wide scale the reported $13 billion in outlays by the New South Wales and Victorian state revenue offices to first home buyers since 2000 – represent around $1,000 for every man, woman and child in the country.
It’s disappointing that the Federal Treasurer didn’t bite the bullet in his 2012-13 Budget and abolish the Grant. It would be good for first home buyers, good for the budget and good for the economy.
Initially, the abolition would be quite a shock to prospective FHBs. But the vast majority would act rationally and wait until the market adjusted downwards, which it would do quite quickly. I anticipate we would see modest price falls – perhaps no more than $10,000 or so for median prices in the sub-$700,000 sector.
The Grant’s original intention back in 2000 was to offset the short-term inflationary effect of the introduction of the GST. But over the years, governments have repeatedly justified the continuation of the Grant as a means of making housing more affordable for first home buyers. Unfortunately, the clear evidence is that it has not helped the cause of first home buyers at all. Rather, it has had the opposite effect.
Between 1991 and June 2000, according to the Australian Bureau of Statistics, the average proportion of total properties purchased by first home buyers was 21.5%. One would hope a policy to improve affordability for first home buyers would see this number rise. Unfortunately, it actually fell to an average of 19.2% between July 2000 and March 2012.
Unfortunately, these grants have always quickly become self-defeating. The increased buying power they provide, in conjunction with the signal they send to other market participants that capital growth is coming, swiftly propel property prices way beyond first home buyers’ means.
Engineering the property market through grants and stamp duty concessions is no solution to improving affordability and not an incentive to invest. Shamefully, governments know this. Rather, it’s been a means to generate extra tax revenue by boosting property sales volumes and prices. But the grants are like an addictive drug. At first, governments delight in the extra revenue the stimulus provides. Then, as the market becomes habituated to the stimulus, property market activity slows and revenues dry up.
In reality, you can’t engineer the market indefinitely – fundamentals determine prices in the long run. Instead, governments make the market more volatile by artificially bringing forward demand and creating a spike in values during bouts of stimulus and, in the process, have made themselves dangerously overly reliant on this revenue stream.
A broader reason to abolish the grants now is interest rates policy. With interest rates coming down and likely to fall more in coming months, reduced borrowing costs will offset much of the nominal impact from a loss of the grants to first home buyers. More generally, with falling interest rates providing upward momentum, the market is less likely to be ‘spooked’ for long by the end of grants.
Moreover, readers of Reserve Bank Board minutes over the last decade know that the health of the property market is a significant factor in its interest rate setting decision making. The Board is eternally watchful against excessive property price inflation driving consumer price inflation.
The removal of first home buyer grants may provide enough of a headwind to property prices to allow the Reserve Bank to cut interest rates a little more than it otherwise would to stimulate economic activity.