First Home Buyers Grant

Steve Keen will walk to Mt Kosciusko because he lost a bet. A bet I would have bet on too, which is that the Australian housing bubble would burst sometime this year. It seems it has been perpetually on the cusp of a 6 month bust for the past 2 years now, and I for one also stick by my analogy of a drunk behind the wheel of a lamborghini, you know he is going to crash but you can't say when.

What confuses and upsets me, is the amount of people my age, that I generally credit with being intelligent being suckered into the property market now of all times.

I would argue that the conventional wisdom that brings you such idiocy as "Buy land they aren't making any more of it" and "Location, Location, Location" and "Put your money in bricks and mortar" doesn't give you the conventional wisdom of:

"A house is worth as much as the banks are willing to lend for it." such that when the government announces an additional $7 grand you would be expecting first home buyers to Groan and throw their arms up in despair.

In fact rather than the press dutifully reporting the opinions of realtors on the matter, many honestly and candidly denounced the boost to the first home buyers grant.

And still it seems people rushed to take it up. Such that when I looked in the Herald Sun yesterday, they had an article on how Melbourne property prices had soared 22%.

Which is bad news, because I was expecting the median house prices to increase by $7 grand, which is like 2.5% or less. How could housing become even less affordable? Then I put it together with this little piece by Steve Keen, from his blog post 'It's Leverage Stupid' and I think if you are young, you need to read and understand this:

So how has a mere $1.2 billion injection of government money driven the average house price up by 8% in six months? By the “magic” of leverage: the typical First Home Buyer (FHB) took that $7,000 to the bank and leveraged it up to another $40-50,000, which then was handed over to the First Home Vendor (FHV) as cold, hard cash.

The FHV then took that extra $40-50,000 and leveraged it to an additional $200,000-$250,000, which meant that that new place which had been just out of reach prior to the FHOB was now well within range. Competing with other lucky recipients of government and bank largesse, he drove up the price of that middle to upper tier house by an additional $100,000 or more.

The aggregate impact of this government enticement into private debt was that Australian households reversed the deleveraging process that had begun in late 2008, and as a result the mortgage debt to GDP ratio, which had been falling, began to rise once more. The FHOB has led to Australians taking on an additional $50 billion of mortgage debt.

So in my own naivety I'd always thought that when people got the First Home Buyers Grant that it was taken off the total loan sort of after the price had been established, like you would be all 'I can afford $250k, but with the FHBG, I can afford an extra 25Gs, so I can bid up to $275k.' and that was how the vendor ended up with all the 'buyers' grant.

But no apparently you take it to the bank, and the bank acts as if that's real savings. And then they lend you $40-50k. so $7 crappy grand results in $50k more debt. It seems criminally stupid on the banks part to treat a government handout as collatoral to lend someone with literally no financial qualification of higher confidence more money.

Which as a property is worth as much as a bank is willing to lend - you just ran up your debt beyond affordability.

BONUS QUESTION:

Investing is simply understood as buying low and selling high. That is how amateurs try to play the stock market. WHy then do you amateur, buy in to the Australian housing market at its historic peak?

BONUS SECTION: Conventional Wisdom Debunked:

1. Buy land they aren't making any more of it = buy oil you moron, not only aren't they making any more of it, billions of people are actively destroying what we have every day.

2. Put your money in Bricks and Mortar = do that moron, buy a stack of bricks and some bags of mortar and put it in storage, see how much they are worth in 10 years. I wager the same or less. (and definitely less when adjusted for inflation).

3. Location, location, location = is actually the only conventional wisdom that actually makes sense, yes you aren't buying a house or a home, you are buying access rights to infrastructure and/or natural resources, which presumably somebody actually productive (ie earns an income by creating actual value) will want access to that site at some point for income generating purposes. With your monopoly you can extort as much money as a bank is willing to lend. (except even with monopolys there is a right price to buy at and a wrong price).