|Among the backdrop of a global “systemic meltdown” caused by irresponsible lending and fueling the biggest housing bubble built on spiraling household debt, the Rudd Government has today announced a new $10.4 billion economic stimulus plan.
Ironically, as part of the package, first home owners will be given an extra $7k bonus to encourage them to take on loans, probably beyond their means and at the top of the housing bubble. This, at a time when most other countries have seen significant falls in house prices as their housing bubbles come crashing down.
Digging deeper into the detail, the first home owners grant will triple for those building a new home. This is to help stimulate construction in the housing sector which has been suffering for a while from poor home affordability.
Michael McNamara, former CEO of Australian Property Monitors said earlier last year that “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.”
The best long term economic stimulus package I can think of is to let the housing bubble collapse. In recent times as house prices rise greater than household income, it eats up more and more of the household budget which in turn reduces discretionary spending (Good thing for the Credit Card!). Once housing asset prices collapse and come back to long term trends, there will be a lot more money in household budgets to then sustainably stimulate the economy.
If the Government really wants to stimulate the ailing residential construction industry, grants for new homes should only be considered. There is no point propping up house prices at the top of a bubble. I’m sure there are better things $1.5 billion dollars can be spent on just now.
» Rudd to Spend A$10.4 Bln to Guard Australian Economy – Bloomberg, 14th October 2008.
» Pensioners big winners in $10.4b stimulus splurge – The ABC, 14th October 2008