A Costly Lesson for First Home Owners

Last year I warned that the increase in the First Home Owner Grant (FHOG) was putting upward pressure on house prices and would inevitably result in severe financial pressure on many first home buyers.

Now we see that those who were reliant on government money to provide a deposit for a house have demonstrated little ongoing capacity to save and were not equipped to cope with rising interest rates, escalating utility rates and a precarious job market.

To add further fuel to the fire, house prices in the lower price bracket jumped by (in some cases) more than the level of the grant, creating a bubble in lower priced real estate. This means many purchasers paid too much, with too little of their own money to have decent equity in their home.

The fact that taxpayers funded this irrational spending with borrowed money made the situation even more ludicrous.

Originally, the FHOG was provided as compensation for the introduction of the GST. It provides another example of why new spending programs that go directly to consumers are extremely difficult to repeal as the demand for their continuation (and often increase) gets ever louder.

After the introduction of a government handout it doesn’t take long for the entitlement mentality to take hold and for people to actually believe that the government has an obligation to give them money to buy a house.

Unfortunately, the policy looks like being a disaster for many who rushed in thanks to Kevin Rudd’s imprudent increase in the incentives.

A report in the Daily Telegraph indicates that 45 per cent of first home buyers are now experiencing mortgage stress and that some are even using credit cards to make their loan repayments.

With more interest rate rises forecast, the situation will only get worse for many of those already suffering. Compounding the mortgage stress is the 16 per cent increase in electricity bills, 14 per cent increase in water costs and gas going up by nine per cent.

These are the costs that Kevin Rudd promised to contain and demonstrate conclusively that his rhetoric is removed from reality.

The potentially disastrous consequences of Rudd’s increase in the FHOG is a timely reminder that governments have obligations beyond that which is immediately electorally popular.

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