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.