Tuesday, 21 October 2008

Government Handouts Don’t Always Help Those Who Need It

The Australian government's recent first home grant policy change is shameful. Don’t get me wrong, this isn't entirely sour grapes as I’m not in a position to take it up myself, it’s simply a short sighted, bad idea.

For the non-Aussies, the government announced they will double the first home buyers grant from $7000 to $14,000 between now and June 30 2009. First home buyers get a further $7000 for new build houses.

This will only encourage those who can not afford it to take on excessive debt and invest in an asset that is fundamentally overvalued here in Australia. At the same time property owners and investors who hold significant equity in their homes following years of above average returns are given a free ticket to exit the property market before it really starts to fall. It’s well known that the grant isn't actually for first home buyers; it’s actually a bonus for those selling to first home buyers.

Property values at 7-8 times annual income are unsustainable and need to fall. Other countries who had over inflated property markets are currently falling back to averages around 3-4 times income, so why is Australia an exception?

The government is trying to engineer the fall in Australia to be more extended and less severe than other nations like the US & UK, but by doing this all they are doing is passing the losses from those that can afford it and who are sitting on large equity in the properties, and passing it on to the young and so called future engine of the Australian economy who can almost certainly not afford it.

Why isn't the government actively trying to promote people to save some money? Their original proposal of First Home Saver Accounts is still an excellent idea, so why did they all of a sudden change their minds and promote people to skip saving and go straight for their first home?

In 4 years time when people have proven they can save some money and house prices have fallen they will be in a perfect position to buy a house and pay for it over the long term. The banks must have a bug in their ear as they’d rather make money handing out loans, rather than pay interest on savings.

So that’s still the path I’m going to take. Save my money, live within my means and buy a home when I can afford to do so. It seems crazy that I earn as much as I do and can’t affords to buy a home on my own, but that’s the way it is here at the moment.

The process of trying to spend and borrow our way out of every economic hiccup is destined for failure. We can not keep increasing debt levels happily ever after, I know this even without a mortgage, my original debt load was exactly the amount I’d need for a house deposit, and I feel this keenly.

At some point of this financial crisis we’ll all have to take some pain, and I’m glad I started peeling off the band aid in September 2007.

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  1. Great post! Often those things which we think will help, do make people who can't afford it jump on the bandwagon and of course then take a major risk!

  2. That's an interesting post.. Thank you for sharing.. And I agree with you that the risk is a major thing...The loans will not be issued to those who cant afford to take on excessive debt etc..
    Australia home loans

  3. Penny in Perth30/11/08 19:14

    That's an interesting point of view - you're actually the first person I've heard from that thinks those First Home Savers accounts are a good idea.

    I think they are possibly the worst idea ever! I would support them if they were open to younger people (ie like in America where parents can open a college account and pay into it, and relatives can make a donations instead of birthday gifts). I just can't see why any young person would want to lock up their money, just in case they change their mind about purchasing a house - do you realise that if the First Home Saver decides instead that they don't want to buy, but want to go on a holiday, buy a new car, finance university - that the money they have saved goes into their superannuation (and therefore can't be accessed until they are 55+?

    Personally I can only see this FHSA being used by wealthy parents to open accounts in their children's names, to access the government money - the exact opposite people the idea is intended to help.