The First Home Owners’ Boost
For the past two decades your economy’s household debt has grown four fold to an unsustainable ‘peak’ of almost 160 per cent of household disposable income. Some 90 per cent of that debt is in a residential housing bubble. Household net savings has been negative for a couple of years as your constituents spend more than they earn due to the wealth effect created by perpetual doubling in house asset prices.
Suddenly the GFC hits. House prices and consumption start falling. What would your policy response be?
Would you try to encourage household de-leveraging though education with a long term goal to get household debt down to sustainable levels and rebuild household balance sheets? Maybe you could regulate the real estate market, and put market participants under the same umbrella than financial advisers that require a licence and disclosure to sell you a couple of shares? You could encourage prudent lending, and stamp out 100% LVR and interest only loans. In addition, you could stimulate the economy via infrastructure programs to improve the long term productivity of your country.
Or you could fix the household debt problem by encouraging first home buyers to take on even greater levels of debt and give individuals spending beyond their means a $900 handout in hope the problem goes away. In addition, you could tell your constituents you have a strong economy, everything is all right and hide any notion of a private debt problem from them.
Sadly, our government decided in their wisdom to take the latter option. And as Treasurer, you can win awards for this type of leadership.
The First Home Owner Boost
The First Home Owner Boost (FHOB) was announced on the 14th October 2008, a month after Lehman Brothers filed for bankruptcy and among the backdrop of a global “systemic meltdown” caused by irresponsible lending and excessive household debt levels.
For first home buyers purchasing an existing dwelling, the FHOB was a $7,000 “boost” to the existing $7,000 first home buyers grant first introduced on the 1st July 2000. To help stimulate new residential building, first time buyers building a new home would get an extra $14,000 boost.
The May 2009 budget announced an extension to the First Home Owner Boost for another 6 months from the 1st July 2009 to the 31st December 2009. During the last three months, the Boost would be reduced by half.
While the final uptake of the grant is not known for the last three months of operation, it is estimated over 200,000 first home buyers took up the grant.
Designed to “Prevent the collapse of the housing market”
Treasury Executive Minutes released about the First Home Saver Accounts (FHSA) gave an insight into the intention of the First Home Owner Boost. The minutes stated :
The FHOB was announced 14 days after the FHSAs became available as part of the Government’s first stimulus package designed to counter the effects of the global financial crisis. This short-term stimulus was designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market. Contrary to this measure, the FHSA is designed to encourage saving over the medium to long term.
Housing Finance Figures (Cat 5609.0) from the Australian Bureau of Statistics show the FHOB was successful in bringing forward the purchase of a home for many First time buyers. The graph below shows the percentage of first home buyers with finance commitments. As you can guess, the rapid swing around the year 2000 was the effect of the original first home buyers grant taking effect on the 1st July 2000. In June of that year first home buyers only made up 14.8% of commitments. The month later the market was made up of 25.4% of first home buyers. It would appear that grant had a greater effect, than just offsetting the introduction of the GST.
Michael McNamara, former CEO of Australian Property Monitors said “When the $7K first home owner’s grant (FHOG) was introduced in July 1, 2000 median prices for houses in Australian capital cities rose by a staggering $32,000 on average in the following 12 months. Sadly, the FHOG immediately translated into higher property prices eroding any benefit. If the FHOG meant to ease the burden on FHBs then it was a resounding failure.”
Over the early part of last decade, housing affordability rapidly deteriorated locking first home buyers out of the market before stabilising. Then there is a surge starting in 2008 being the result of the FHOB.
Prior to the FHOB, participation of first home buyers in the market averaged around 17 percent between 2004 and 2008. After the FHOB and after bringing forward the purchase of many homes, first home participation is now about 15 percent.
FHOB Poster Couple : Matthew Tregent and Sarah Zajac
Matthew Tregent and Sarah Zajac, both aged 19 was the poster couple of the FHOB. They purchased a 464 square metre block of land in Deer Park, 18km of Melbourne’s CBD and built a home on it using $26,000 of free money from the government. The loan totalled $378,000 at a time when Interest rates were at the lowest level in decades.
But fast forward to November 2010. Matthew Tregent and Sarah Zajac was forced to sell their home, not because they were suffering mortgage stress – but their neighbours were. “It looks like there is a bit of hardship in the area. There’s a lot of houses that are going up for sale,” Mr Tregent told the Age. “Why we’re planning on moving is because we’ve been taken over by investors predominantly. It’s becoming, I guess, less desirable to live here.”
» Grants help teens into a house of their own – The Age, 6th March 2009.
» Stressed home owners sell up – Brisbane Times, 4th November 2010.
» Australian Government announces increased grants to encourage people to take on more excessive debt – WhoCrashedTheEconomy?, 14th October 2008.
» First Home Owner’s Boost Extended Wayne Swan, 12th May 2009.
» Boost : From zero to bubble in eight short months – WhoCrashedTheEconomy?, 14th June 2009.