First Home Buyers Grant

One economist has predicted that Australian house prices are a price bubble ready to burst, forecasting a 20 per cent fall before 2011 and stagnant or declining prices for up to a decade.

A similar prediction has been made in the UK with one pundit foreseeing a 50 per cent decline in house prices in the years ahead.

The USA has, of course, seen massive house price falls already with some homes in the suburbs of Detroit available for as little as one dollar. Yes, you read that right – just one dollar!

It goes to show that the conventional wisdom that ‘you can’t go wrong with property’ is as flawed as most other investment advice delivered by well-meaning people around the barbeque.

Historically, property appreciates at around the level of inflation. Occasionally it runs much harder than that, fuelled by easy credit and the fear of missing out on your dream home in a rising market. There are also times when it severely underperforms the inflation target. It looks like now is one of those times.

A home is seldom a good financial investment in any critical analysis, yet for most people, buying a home is a good idea. It acts as a form of saving over the long-term and often provides some peace of mind that they’ll always have a place to live.

However in my opinion, Australian property prices are too high and there is little reason for them to remain at current levels given rising unemployment and the as yet unofficial recession.

Even so, house prices are currently being artificially inflated by the first home buyers grant. This grant is simply a gift to sellers of homes that appeal to first home buyers, keeping prices higher than they otherwise would be.

It provides first home buyers, who often admit they are incapable of saving a deposit for themselves, a chance to buy their first property.

Perhaps you think this is a good thing. Well, I disagree.

How is giving someone who cannot save for themselves thousands of dollars to purchase an overpriced asset and committing them to a very large long-term debt a good use of taxpayers’ money?

For those that argue it is a stimulus for the economy, it’s worth bearing in mind that around 80 per cent of first home buyer grants are used to purchase an existing dwelling rather than construct a new one. This keeps the real estate agents and state government stamp duty commissioners happy but that’s hardly a compelling argument.

If stimulating the economy is the main objective then why isn’t the grant limited to new dwellings? At least then some jobs and activity is generated by more than paper shuffling.

At the current low interest rates, taking on a large debt might not seem too threatening. However, how are these same first home owners, who couldn’t save a deposit of their own, going to manage their obligations if they lose their job or get caught by rising interest rates?

And interest rates will rise. It is an inevitable consequence of the imprudent short-term monetary policy settings being pursued by government in Australia and across the globe.

In light of that brief analysis, it’s time for the first home buyers grant to go. Yes, property prices will likely fall as a result but that is better than having taxpayers keep them artificially inflated for no good reason.