Will Rudd bring the house down?

Last year Deputy Governor of the Reserve Bank of Australia, Mr Ric Battellino addressed the 7th ITSA Bankruptcy Congress with an update on household finances. In his speech, he raised differences between the Australia and U.S. housing markets :

“A third important difference between Australia and the US is in the groups that the lenders targeted, and in the loan terms on offer. In Australia, the lending boom was concentrated on existing home owners who traded up to bigger and better houses and bought investment properties. Many of these were people in their 40s and 50s who previously had low levels of debt. “ said Mr Battellino.

But how things have changed.

It all started last year on the 14th of October when the Australian Government announced increased grants to encourage people to take on more excessive debt. Under the First Home Owner’s Boost program, the Government gave an extra $7,000 to first home buyers purchasing existing dwellings and an extra $14,000 to first home owners wanting to build a new dwelling.

A couple of weeks later the NSW State Government got in on the action : NSW Government to join Federal in encouraging young first home owners to take on large debts. They are offering $3,000 of cream on top of the boost.

We are now starting to see examples of where all these incentives are going. Valentina Popovska appeared in the Sun Herald on the 1st of March, “thrilled” with her new home. It means that they now work 7 days a week and are paying a mortgage almost double their rent, but they were able to purchase their first home without needing a deposit.

Then emerged the story of teenager’s Matthew Tregent and Sarah Zajac who has brought a block of land and using $26,000 in government grants and $5000 of their own savings to build their first home.

The daily telegraph reports that Western Sydney is in the grip of a property mini-boom “with more than 50 per cent of all sales being first home purchases – with most sold for less than $500,000.”

However Australian Financial Group’s (AFG) general manager of sales and operations Mark Hewitt said “with more first home buyers entering the market, the loan-to-value ratio (LVRs) has risen steadily to a record high of 72.5 per cent in January” Many First Home Buyers enter the market with little to no deposit, relying solely on grants.

There are even reports in some area’s that the surge of first home owners are bidding up prices in excess of value of the grant, in order to secure the grant before it expires at the end of June 2009.

With the boom fueling more applications for home loans, lenders want the grant extended beyond the June 30th deadline. News Limited reports “Loan Market Group executive director John Kolenda said there has been a 300 per cent increase in inquiries from first home buyers since October. “Extending (the grant) will have a positive flow-on effect for the entire housing market and that will be beneficial to the whole economy,” Mr Kolenda said.”

But the driving force behind the latest boom cannot be all attributed to the First Home Owners Boost. The RBA has aggressively cut interest rates to a 45 year low of 3.25%, however the likelihood of rates remaining this low for the duration of a 25 to 30 year loan is next to none.

The other prospect facing new home owners is the possibly of either losing their job or the reduction in wages. To reduce the number of jobs to be slashed, many employers are opting for wage cuts or a move to a four day week with a 20% reduction in wages.

Only time will tell what the effect’s of Rudd’s subprime frenzy will be.

» Young families defying recession to lead revival – The Daily Telegraph, 7th March 2009.
» Grants help teens into a house of their own – The Sydney Morning Herald, 6th March 2009.
» Home loan lenders want FHOG extended – News Limited, 5th March 2009