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.

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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.