A very narrow gap between gross rental yields and mortgage interest rates is a buy signal for investors.
The slow painful death of the first home owner grant
June 11, 2013 Like a B-movie horror flick villain that refuses to die, the First Home Owner Grant (FHOG) will limp into the new financial year to haunt us all despite the Victorian Treasurer’s valiant efforts in his May Budget to curtail this beast. Yes, the $7,000 grant for established property will be phased out on 1 July. But it will be increased from $7,000 to $10,000 for newly constructed homes. I’m no fan of grants or concessions that distort the property market. I’ve been railing against the FHOG since it was introduced back in July 2000 ostensibly to offset the effect of the GST on home ownership. In its original guise, the FHOG was a national scheme funded by the states and territories and administered under their own legislation, with a one-off grant of up to $7,000 payable to first home owners that satisfied all the eligibility criteria. Since then, this scheme has been tinkered with remorselessly to become the Frankenstein’s monster I alluded to earlier. The scheme is meant to make property more affordable for first home buyers. Unfortunately, experience shows that the grants don’t achieve this end. Instead, the nominal increase in purchasing power it delivers to first home buyers transmits directly into higher prices for the properties they hope to buy. The real beneficiaries are the vendors of properties that first timers buy. It would have been simpler if the State Revenue Office of Victoria, who administers the Grant, posted the Grant cheque direct to the vendor! The fact that the Grant was economic lunacy – and costly to governments’ coffers to boot – didn’t seem to bother politicians in the noughties when state governments were basking in pre-GFC budget surpluses. But now that state treasurers across the country are struggling with fiscal deficits, one by one, they’ve been winding back the FHOG. Victoria is just the latest. More focus is now going to providing grants for new property. At first blush this seems like a good idea. The grant has been amended so that it boosts supply – by encouraging the construction of new apartments and houses – as well as demand. However, I am concerned that there will be serious unintended consequences. The Grant will continue to distort market conditions and performance. It will artificially skew property data, especially median values, possibly enough to make them virtually meaningless if the stock level is very high. And, most worryingly, it will encourage many first home buyers who otherwise would have opted for existing stock to purchase new and off-the-plan properties. Why is that problem? Well, I’m afraid that many of these first home buyers will come to regret their decision. Let me be blunt: much of the off-the-plan property under development is usually in windy Docklands or in fringe suburbs poorly serviced by transport; many properties are poorly built and deteriorate quickly; and, ultimately, many first home buyers and investors will lose money when they come to sell these properties in a few years because of developers’ need to cover their extensive marketing costs and to extract a profit. In short, these properties are invariably over-priced in the first place relative to what they would sell for in an open market. Further, when the first time owner goes to sell the property, they will be competing against a glut of similar properties. We all know what happens when you’re faced with a buyer’s market! I’m hoping that this is the penultimate chapter in the Grant saga, and that sanity will finally prevail and we can get politically bipartisanship to kill it off. But I’m not holding my breath. Image: zirconicusso