photo credit: Pink Sherbet Photography

Adam Schwab from Crikey:

In one of the more remarkable occurrences, residential property, despite macroeconomic indicators to the contrary, has been an incredibly resilient asset class this year. In fact, the “affordable” sector of the property market is trading at record high levels, while auction clearance rates in major cities remain above 70 percent (in Melbourne, the clearance rate is above 80 percent). The use of inverted commas around the word “affordable” is intentional  — for many, the “affordable” sector of the housing is perhaps ironically, relatively unaffordable.

To purchase a property within 15 kilometres of a major city, first home owners are required to spend often upwards of six times average incomes, double the amount previous generations would spend on a home. That means one of two things is happening; people really like buying homes these days, or punters are vastly overpaying for residential property, or perhaps a little of both.

Property bulls will no doubt argue that the housing sector in Australia is not really over-priced, but due to the shortage of satisfactory property, the price is at an equilibrium level.

While supply issues no doubt have a short-term effect (Australia still has significant net population growth), in the longer term, the free market requires capacity to increase to match the higher demand. (Australia isn’t Monaco, urban centres take up a mere fraction of total land).

No, the major impetus for the prevailing boom is the continued, boosted first home owner’s grant and the ongoing lax lending standards exhibited by major banks. The FHOG is a dreadful piece of policy which has the unfortunate effect of inflating the cost of homes for young people. Various potential buyers, all with the grant in their back pocket, simply bid up the price of a property to what they could afford, plus the value of the grant, plus the leverage they are able to obtain. (Figures released last week indicated the “first home buyer” sector continues to dominate property prices with data indicating that 29.5 percent of owner-occupied mortgages were to first home buyers. Before the grant was boosted, the figure was around 12 percent).

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photo credit: Hamed Parham

The First Home Owners Grant nightmare continues, with elements of it borrowed and extended by the American HUD. Young US home dreamers will suffer like we have:

Two new applications of the federal tax incentive for first time homebuyers – allowing them to use the $8,000 credit for down payments and on land contracts -will allow more people to take advantage of the purchase incentive, said housing industry experts.

Housing and Urban Development Secretary Shaun Donovan announced this month that Federal Housing Administration-approved lenders could monetize the tax credit through short-term loans so that buyers could use it for down payments.

The American twist is that land bankers can also benefit from it. As commented on time and again via this blog, the First Home Owners Grant should be re-named the Home Sellers Subsidy. If everyone gets $8,000, then the price of land and housing goes up at least $8,000. The same can be seen for most markets, with the $2000 subsidy for LPG car fit outs increasing the price by the same amount. Reports are coming through that the $1600 Home Insulation subsidy is having similar effects there too.

The US article goes on to quote the glee in the real estate industry:

Matt Dejanovich, a Realtor with Real Estate One in Ann Arbor, said being able to apply the tax credit toward down payments would have an immediate impact. That’s because, he said, many potential buyers who would quality for the credit and have secured loans just don’t have the cash on hand for down payment and closing costs.

“If there was a way to get your hands on that money at the closing table, I could sell a house this afternoon,” he said.

With 19 million vacant homes existing and half finished houses being bulldozed throughout the US, the last thing they needs is more urban sprawl. That is what the extension of the tax credit will do to the land market.

Lobbyists win again. Real estate agents should be called Fffffantasy Agents. Who is standing up for the rights of young American families? Economic trickery will only be outlawed when people have a decent understanding of economic forces. Listen to our podcast.

With all the promise of a tough budget, the biggest concern is the limp wristed, white flag response to the First Home Owners Grant (FHOG). Rudd’s recent mention that’ the FHOG won’t go on forever’ must have seen some furious lobbying in the halls of power by the Ron Silverberg’s (HIA) of the property lobby.

Last night we learned that it will go on. The FHOG will be extended in full for another 3 months and then halved and continued – for another 3 months. Why doesn’t the government just give the property lobby the money directly? The $539million allocated over three years will have a tragic multiplier effect on land and housing prices.

The Age’s Chris Vedelago showed that average prices in poorer suburbs increased by more than the grant, with the average uplift in these Victorian suburbs being $27,000.

Since the FHOG increase in October 08, and by averaging the monthly First Home Grants over the last 4 months we have stats for, we can assume that 146,201 renters will have been manipulated into buying property by the start of the spring real estate season. Then the traditional spring seasonal demand will replace any downturn from the halving of the FHOG at the end of September.

The average FHO loan over the last year was $255,000. By adding the $27,000 bump up that the FHOG will add to the average loan, these aussie battlers will pay $195 extra per month.

Over the next year this means that first home owners will pay $28,509,195 in additional payments to the land banking developer and the lip-licking bank executive.

Over the 25 year lifecycle of the loan, this will add $31,548 in total payments to their mortgage. Taken to it’s logical conclusion, 146,201 first home owners (make that 200,000 according to the latest figures) will pay a combined 4.6 billion dollars more to the property and banking industries than they should have.

That’s how $539 million turns into a $4.6billion handout for the lucky few.

We are being conservative in these figures as they do not include the $6000 increase in FHOG from the Brumby State government. New house owners will now receive $32,000 in handouts ($21k federal and $11K state), and as Saul Eslake warned the ALP before they took office, this will naturally cascade into higher land and housing prices. Economics dictates this, no matter how smooth Swan looks.

The infrastructure boon will also prop up land prices in prime locations. Lucky speculators in Werribee South will be very happy when they can advertise a reduced travel time to the CBD.

Year on year from February 2008 there has been a 19% increase in the size of FHO loans. This is a $52,700 spike.

Tragic economics Mr Swan. Casino economics for the lucky speculative retiree.

These extra payments will undermine the so-called pump priming benefits of the $57.6bn deficit. Why? Because these households and indeed any other recent home purchaser will not have the comfort money to engage in the consumer lifestyle so necessary to bounce this economy back into 4.5% growth territory.

As a spin-off, such FHOG distortions will also help consolidate small business in wealthy areas. Wealthy communities will be the only ones willing to support boutique, creative enterprise. Choice will expand at the top but yet gets dumbed down for the traditional Labor supporter.

In years to come someone will release a study proving the effectiveness of handing lobbyists the money directly rather than using economic trickery to boost their bottom line. If young people knew about the sucker punch they are falling for, they would offer to roll out the red carpet for the property lobby. Why not? It would be more economical for us to give them the money directly AND to fly to Canberra to put on a giant party for the property lobby, with Gen X, Y and Z waiting on them hand and foot for a whole weekend rather than spending their lives hocked up to their eyeballs in debt.

The 6 month reprieve for the housing market has now been extended. The Rudd government is aiming to lock us into 40% plus payments on our mortgages, more than any other generation.

And to top it off, clean coal was given the majority of funding in the clean energy component of the budget.

photo credit: bjornmeansbear

With climate change forging into our conscience day by day, how are Gen X,Y & Z to feel when they realise they have been ripped off like no other generation before? The increase in the First Home Owners Grant saw nearly 13,000 youngsters manipulated into buying at the top end of the property cycle in January alone.

Tell your friends – whatever you do, DON’T BUY NOW! This is an 18 year property cycle and will pop soon.

The financial illiteracy of the general populace is further enhancing the wealth gap. Will economic know-how be seen as crucial once the dust settles on the ugly months we have coming our way? The wisened property speculators have left the market spectacularly, cashing out just as their advisers directed. What a pity youngsters have Paris Hilton to advise them….

The lobbying forces for an extension of the FHOG are in full effect (it is due to expire June 30). It is widely understood amongst policy wonks that this is being used as a pump priming stimulus package to buffer the construction industry, rather than to provide affordable housing.

However, the reality of day to day life sees many youngsters miss the nuances in the debate. Mainstream media does little to bring balance to this looming tragedy. With the property lobby the major benefactors to political companies/ parties, it seems likely that the dominance of lobbyocracy will again prevail in this world of poll driven, spineless politicians. Ruddy pawns.

And to think that Brumby-otis has hit again with Minister Madden ripping planning controls for major developments from the closest thing we have to grass roots politics – local councils. This will see large tracts of public land sold to VicUrban or major political donors who have played the game of land hoarding until their planning desires are finally approved.

The casualisation of the younger workforce exposes a massive risk. Banks are like sitting ducks for our sub-prime like FHOG recipients. Will they get bailed out when the effects of the job layoffs start to cascade into foreclosures? Michael West reports:

Outside the first-home buyers, interest rate cuts have done little to spur growth. Since August, the number of loans to existing owner-occupiers has risen only 1.2 per cent, compared with the 65.4 per cent surge in first-home buyer loans.

Colebatch goes on to say:

In a dramatic reversal of the trend towards increasing ownership of homes by negatively geared investors, the financial crisis has seen first-home buyers lift their share of lending from 17 per cent to 29 per cent in just six months.

At the same time, the share of lending for home purchase going to investors has shrunk from 40 per cent to 30 per cent, as the banks become more wary of lending, and investors more wary of borrowing.

The Bureau of Statistics reports that lending to would-be housing investors so far this year is down roughly a third from a year earlier, plunging from $12 billion to about $8 billion.

The net result is that while lending to first-home buyers has risen 84 per cent since the Government lifted the first home buyers grant, the total amount lent for housing has risen far more modestly, by 11 per cent.

Warn your friends – don’t buy now! Wait a year. You’ve heard that before we know but this is an 18 year cycle, a generational cycle that goes back 400 years. Read Boom Bust 2010 or listen to a recent interview with the author Fred Harrison. Time for some laughing yoga to get through this…..

Commonwealth bank CEO Ralph Norris made some sensible comments about the first home owners grant, note particularly the second paragraph on the FHOG enabling the same risky lending as the sub prime lending practices in the US.

“The first home buyers grant has provided a stimulus to this point, but we have to be careful that this doesn’t become a situation where this is an open-ended offer,” Mr Norris said.

He noted the subprime lending woes in the US had largely come about because people who could not afford to borrow were encouraged to.

“All of us have to make sure we’re lending responsibly to first home buyers,” he said.

Please read this piece on the risky nature of the FHOG (that started this line of thinking), the speculative storm brewing and also the following warning – RENT DON’T BUY!