Wednesday, October 15, 2008

Grant Increase Still Ignores Affordability Problems

A major part of the Federal Government’s economic stimulus package is the dramatic increase in the First Home Buyers’ Grant. Along with the other measures, this increase is intended to push money into the economy and thus encourage growth. Equally importantly, the boost to the First Home Buyers’ Grant is also intended to boost activity in the property market, and the additional increase for new construction is an obvious measure to help support the building industry. But will it work?

Prior to the Global Financial Crisis, the idea of increasing the First Home Buyers’ Grant was widely considered to be counter productive because it contributed to price growth at a time when housing unaffordability was already at an extreme level. On top of that, pushing up the demand, and the price, didn’t, and won’t, necessarily increase the supply. On the supply and affordability front, other factors are contributing to the problem.

Affordability has been directly affected by extreme fees and charges imposed by State and Local Authorities. At the same time, supply has been constrained by land release policies, along with inefficient approval processes, which are also a State responsibility. Despite all the concern which has been expressed about affordability over the past few years, the truth is that there are many vested interests in keeping prices up. Developers, Government Authorities, existing property owners all have an interest in values remaining high, regardless of what they might say about affordability. The only people who would benefit from a fall in values are those who have not yet bought and are biding their time, waiting for their opportunity.

The fact is that the housing market is still in a price bubble, partly because of the artificially constrained supply. At some stage, that bubble has to be deflated, either by values falling, or by incomes rising, or a combination of both. Until that happens, there will be many prospective homebuyers who will still be reluctant to enter the market at a time of such uncertainty. Even a $21 000 grant can disappear pretty quickly if 20 or 30 percent disappears from the price of the home you just bought.

For that reason, the increased grant on its own may not be enough to kickstart the building industry, despite the fact that construction is desperately needed.

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