FHB Boost is Australia’s “Sub-prime Lite”

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The First Home Own­ers Boost (as it is offi­cially known) has cer­tainly given the Gov­ern­ment bang for its buck. By spend­ing roughly $200 mil­lion of its own money to date, it has added about $3 bil­lion to the hous­ing mar­ket. But the addi­tional $2.8 bil­lion has come from increased mort­gage debt taken on by those most vul­ner­a­ble to a seri­ous eco­nomic down­turn, at a time when the lat­est “unex­pected” increase in unem­ploy­ment indi­cates that, like it or not, the global down­turn is com­ing our way.

Amer­ica tried a sim­i­lar trick in 2000, when the col­lapse of the Dot­Com bub­ble threat­ened to cause a seri­ous reces­sion: it was called Sub­prime Lend­ing. There should be lit­tle doubt now that that scam–which at the time received sub­stan­tial gov­ern­ment backing–simply delayed the day of reck­on­ing, and made the even­tual cri­sis much, much worse.

With Australia’s belated ver­sion of Sub­prime-Lite, we appear to be mak­ing the same mis­take (The Sun­day Tele­graph made this issue their page one lead today–“House Price Cri­sis Looms”–and fol­lowed up with the fea­ture Our home-grown sub-prime cri­sis). It’s on a smaller scale, and the bor­row­ers aren’t so trans­par­ently uncred­it­wor­thy. But we are attempt­ing to avoid an eco­nomic cri­sis caused by too much bor­row­ing, by encour­ag­ing the poor­est in our com­mu­nity to take on yet more debt.

Very few of those who’ve received the FHOB would qual­ify as Sub­prime as it was defined in America–a bor­rower actu­ally had to have a poor credit his­tory to get a Sub­prime loan. But First Home Buy­ers are, almost by def­i­n­i­tion, young and newly in the work­force. They will be amongst the first to lose their jobs when the down­turn bites.

So while The Boost may give a tem­po­rary fil­lip to the bot­tom end of the hous­ing mar­ket, the con­struc­tion indus­try, and the econ­omy, when unem­ploy­ment con­tin­ues its unex­pected (there’s that word again!) rise, many First Home Buy­ers will be at the head of the dole queues. And as well as being unem­ployed, they will also be home­less and bank­rupt.

Had they not been enticed into the hous­ing mar­ket at absolutely the worst time by a mis­guided Gov­ern­ment pol­icy, they would still have lost their jobs. But at least they would not also be fac­ing bank­ruptcy as well.

There are mul­ti­ple influ­ences that have enticed a flurry of First Home Buy­ers into the market–falling mort­gage rates, and the cease­less spruik­ing of The Aus­tralian Dream amongst them (the lat­ter reminds me of the promo for the Terry Gilliam movie Time Ban­dits: “Like all the dreams you’ve ever had. And not just the good ones”).

But The Boost clearly was the major force behind the 4% jump in the pro­por­tion of hous­ing loans going to First Home Buy­ers in Novem­ber 2008. The extent to which First Home Buy­ers have been used as pawns by gov­ern­ments of both polit­i­cal per­sua­sion to reflate the hous­ing bub­ble is obvi­ous in the fol­low­ing chart:

First Home Buy­ers went from 19.4% to 23.6% of the mar­ket in the first month of The Boost, and their share of new house pur­chases has since risen to 26.5%–the high­est share since records began in 1991. Rumour has it that a major moti­va­tion for The Boost was Treasury’s advice that the same trick had pre­vi­ously worked a treat for Howard, and the evi­dence for that sticks out like two sore thumbs in the data.

On these num­bers, Rudd’s Boost has prob­a­bly enticed an addi­tional 10,000 pur­chasers into the mar­ket in its first 3 months, with each tak­ing out, on aver­age, $270,000 in debt.

These First Home Buy­ers have also bor­rowed more on aver­age than other pur­chasers: the aver­age for non-First Home Buy­ers was about $250,000. Over the long term, loans to estab­lished buy­ers have been larger than those to new entrants into the mar­ket, as you would expect:

How­ever since 2005, as often as not, new entrants have bor­rowed more than estab­lished buy­ers. The dra­matic rise in the amount bor­rowed by First Home Buy­ers pre­ceded The Boost, and the phe­nom­e­non was com­mon to estab­lished buy­ers too; so it can’t be blamed on The Boost alone. Nor can it be attrib­uted to Aus­tralians increas­ing their debt lev­els in response to lower inter­est rates–the stan­dard fur­phy that the RBA has pushed occa­sion­ally to jus­tify ignor­ing ris­ing pri­vate debt lev­els. In fact, the increase in the aver­age level of mort­gage debt began in March 2008, the date of the RBA’s final 0.25% increase in the cash rate in its Quixotic bat­tle against infla­tion.

But it is obvi­ous that at a time when the rest of the Aus­tralian com­mu­nity has started to reduce its level of lever­age, First Home Buy­ers are still increas­ing theirs.

Demo­graph­ics on First Home Buy­ers are unavail­able, but they are cer­tain to have lower incomes, and (were it not for The Boost) lower deposits, than those who have pre­vi­ously pur­chased a house. They are also cer­tainly buy­ing cheaper houses than estab­lished buy­ers. This means that they have higher debt ser­vic­ing costs, on lower incomes, than estab­lished buy­ers, and have pur­chased less valu­able prop­er­ties with them.

A sur­vey by Fujitsu Con­sult­ing (which has con­sis­tently pro­duced real­is­tic and empir­i­cally grounded reports on eco­nomic and finan­cial issues) found that 30 per­cent of First Home Buy­ers had loan to val­u­a­tion ratios of 95 per­cent (Aus­tralian Finan­cial Review, March 21–22 p. 20). Only 12.5% of First Home Buy­ers had a loan to val­u­a­tion ratio of under 80% (Fujitsu Con­sult­ing Feb­ru­ary 2009 Stress-O-Meter Update, p. 39). Together with anec­do­tal evi­dence that The Boost has ignited activ­ity in the sub-$500,000 price range, this implies that the aver­age First Home Buyer is rely­ing upon the gov­ern­ment grant for more than 50% of the deposit.

Indi­vid­u­als with the most vul­ner­a­ble jobs, low­est incomes, and the low­est net worths, have thus been enticed into debt at a time when the rest of soci­ety is busy de-lever­ag­ing. They are there­fore surely more highly geared, and more finan­cially frag­ile, than the rest of the com­mu­nity.

From the government’s point of view, these might be–dare I say it–“a beau­ti­ful set of num­bers”. Cour­tesy of The Boost, 10,000 or so extra bor­row­ers, spend­ing between $14,000 and $24,000 of gov­ern­ment-sourced money, plus on aver­age $270,000 of bor­rowed money, and their own sav­ings of less than $15,000, have added at least $300,000 each to the Aus­tralian hous­ing market–and indi­rectly the econ­omy. This is a $3 bil­lion boost to the econ­omy: roughly an addi­tional $1 bil­lion a month.

Not a bad return for a Gov­ern­ment pol­icy that has cost it well under $200 mil­lion: pump in $200 mil­lion, and get $3 bil­lion worth of stim­u­lus for the econ­omy.

The prob­lem is, this may not be pump-prim­ing the econ­omy, to bor­row an over-used and inap­pro­pri­ate anal­ogy, but sub­prime-pump­ing it.

The Rudd Gov­ern­ment may well rue Treasury’s “sure thing” advice when unem­ploy­ment here starts to sky­rocket as it has in the USA and else­where. They will then have a cohort of–on cur­rent trends–at least 30,000 First Home Buy­ers who are in the fir­ing line for unem­ploy­ment, home­less­ness, and bank­ruptcy cour­tesy of yet another futile attempt to stim­u­late the econ­omy by main­tain­ing the Great Aus­tralian Dream.

This eco­nomic turn­around is inevitable, because the dri­ving force behind it is de-lever­ag­ing: credit growth is evap­o­rat­ing, and as it dimin­ishes, the debt-financed com­po­nent of demand is col­laps­ing and tak­ing eco­nomic activ­ity with it. This process is now ram­pant in the USA:

And it is also build­ing up a head of steam in Aus­tralia:

The rise in unem­ploy­ment will impact severely on house prices, since, as Ger­ard Minack com­mented in today’s Sun­day Tele­graph, “I don’t care what rate you’re pay­ing, if you have a mort­gage five times your income and you lose your job, you’re toast”.

Aus­tralians in gen­eral, and the prop­erty mar­ket com­men­tariat in par­tic­u­lar, are in denial about the extent to which Aus­tralian house prices are overvalued–and there­fore over­due for a fall that The Boost is only tem­porar­ily delay­ing. Even a sim­ple com­par­i­son of the ABS House Price Index for Aus­tralia to the US Case-Shiller Index, when both are deflated by the CPI, shows that the Aus­tralian house prices bub­ble was sub­stan­tially larger than America’s:

How­ever, even this under­states the degree of rel­a­tive over­val­u­a­tion here, since the late 1980s, when the ABS series began, was itself a time that there was a bub­ble in Aus­tralian house prices. To make a fair com­par­i­son, we need a time series that goes back as far as the USA’s, and there­fore is unaf­fected by short term bub­bles and slumps.

Nigel Sta­ple­don at UNSW pro­duced such a time series for his PhD, and I repro­duce his data here, with the value in 1890 set to100– the same value as for the Case-Shiller Index, which begins in that year. This enables a more real­is­tic com­par­i­son of the size of the hous­ing bub­ble in the two coun­tries.

This chart gives a more real­is­tic pic­ture of the most recent Aus­tralian house price bub­ble:

On this basis, the cur­rent Aus­tralian house price bub­ble is about 75% more extreme than the USA’s, which is now clearly in free-fall. A fall in Aus­tralian house prices is inevitable, and it will be dri­ven by the house­hold sector’s attempt to de-lever from its cur­rently unprece­dented level of debt.

This de-lever­ag­ing will drive the econ­omy down, tak­ing employ­ment with it–and espe­cially the jobs of First Home Buy­ers, who are def­i­n­i­tion have less secure employ­ment than older, estab­lished home own­ers.

As I argued when The Boost was first announced (Res­cu­ing the Econ­omy or the Bub­ble?; Debt­watch Blog Octo­ber 19 2008), the pol­icy is a mis­take that will back­fire on the Rudd Gov­ern­ment when the global finan­cial cri­sis finally comes home to roost here. Despite the bleat­ings of the prop­erty lobby, it should not be extended past its cur­rent ter­mi­na­tion date.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • GMI

    Has any­one read “100 years of land val­ues in Chicago”? This seems to be a replay of many cycli­cal boom/busts.

    I am liv­ing between Switzer­land (where home prices are still below their 1992 lev­els) and Perth Aus­tralia. We have been try­ing to buy one of the many empty houses North of Perth for the last 2 years. These houses are AU$800k to AU$3m. NONE of them are directly on the beach and there are too many of them to count. 

    We have been hop­ing for them to drop in price but this doesnt seem to be hap­pen­ing. I dont know any­one from our com­mu­nity in Mul­laloo who is a mil­lion­aire. I dont know any­one in that com­mu­nity who makes +200,000$ a year. Who is going to buy these houses? 

    You guys are wor­ried about first time home buy­ers cre­at­ing a sub­prime mess, but I dont see how that can hap­pen if there are only houses for Mil­lion­aires. Per­haps its dif­fer­ent in the East? 

    All of my Aus­tralian home price indi­ca­tors show that Aussie home prices should be 60% below cur­rent lev­els over the next three years. But how could they have got­ten this pricy in the first place. 

    As far as “Shadow’s” com­ments: I dont think you have ever put together an sta­tis­ti­cal data­base before in your life. Its not easy, but its not rocket sci­ence either. If you dont like his find­ings then get the data and run a 3 year mov­ing aver­age on it till 1972. Thats about as accu­rate as you can prob­a­bly get. I think the US cen­sus data for New Home Sale Prices is no more accu­rate. There are always anomolies. I think Homer Hoyt shows this very clearly. Per­haps you are too insu­lated and used to the world of “Bloomberg data”?

  • Steve

    I am not an econ­o­mist. The main focus of all your work is the so called debt dynamic. It seems to me there is a real pos­si­bil­ity of a reces­sion now bot­tom­ing and becom­ing some­thing far milder than many feared. I fol­low the debt argu­ment but hold to a view that it is a prob­lem that could be suc­cess­fully spread over­time. Aus­tralian consumer’s appetite for debt is sub­stan­tial and will not be eas­ily derailed. Con­fi­dence remains high as does the will­ing­ness to bor­row. Eco­nomic growth in China may just be enough to pro­vide the cush­ion Aus­tralia needs to keep its love affair with debt going albeit at a more mod­est pace. At this stage I am still see­ing banks freely lend­ing money and house prices if any­thing sta­bil­is­ing or pos­si­bly even start­ing to rise.

    It is not pos­si­ble that what may be hap­pen­ing is a world econ­omy that is on the path to some sort of recov­ery? The debt prob­lem remains and will have to be dealt with. The point is that is may become a prob­lem that could be delayed for sev­eral years. You make very pow­er­ful argu­ments but maybe your tim­ing is out. Gov­ern­ments around the world are deter­mined to stopped and reverse this slow down. Although this is not the best course of action as it will only delay the need to cor­rect struc­tural imbal­ances, there seems to be some evi­dence that in the short-term gov­ern­ments are suc­ceed­ing. The point, how­ever, is that if gov­ern­ments do suc­ceed a serve down­turn might be sig­nif­i­cantly delayed or bet­ter still man­aged over a longer period of time, we may be head­ing for an L shaped mild reces­sion.

  • The Out­back Ora­cle

    Robert, I’m not Steve, but in my opin­ion, it is pos­si­ble you might be cor­rect, although Steve’s take is that it is damned near impos­si­ble to print enough money to fill the hole. I doubt an L shape would describe what will hap­pen in your sce­nario.
    There has to be some engi­neer­ing model, of increas­ing oscil­la­tions of insta­bil­ity, that would describe what will hap­pen if you are cor­rect.
    The pos­si­bil­ity that Obama, Bernanke, Gei­th­ner, Brown, Rudd, Duck et al will get this “just right’ is infin­ites­mally small. There are two issues. Even if you had a clue what you were doing, the chances are almost nil. The fact that this lot have no idea how we got here in the first place, makes a suc­cess­ful out­come absolutely impos­si­ble.

    So, under your sce­nario, we will have another ramp up of debt, and a mon­strous break­out on the infla­tion side. When inter­est rates rise in response to that, even if they remain in real after tax terms neg­a­tive, every­thing will get smashed again even worse than this time. In another forum, in response to my com­ments it was described to me this way
    Imag­ine a kid on a bike who starts to get the wob­bles
    Wob­ble! Wob­ble! Wob­ble! WOBBLE! SPLAT!

    It is bet­ter illus­trated if you can increase the size of the font for each wob­ble! 🙂

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  • Jim

    Steve,
    Some mem­bers of the press are finally start­ing to come onboard. This eco­nom­ics writer could not have put it any bet­ter “Seem­ingly unaware of the false econ­omy, first-home buy­ers have engaged in a game of mutu­ally assured destruc­tion”:-

    http://www.smh.com.au/opinion/its-bricks-and-slaughter-out-there-20090421-adxz.html?page=-1

  • Jim

    Steve,
    Here are another two arti­cles that just sur­faced warn­ing of the same poten­tial prob­lems you have out­lined. The first arti­cle makes exactly the same anal­ogy that you did:-

    “Aus­tralia was (is) in dan­ger of los­ing this trea­sured bank sta­tus because of our own ver­sion of sub-prime.”


    How our banks went too far — Robert Got­tlieb­sen


    Bad bank­ing turns crazy — Robert Got­tlieb­sen

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