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Blowing housing bubbles

By Gavin Putland - posted Monday, 2 November 2009


The only public dissenter that I've noticed is the Real Estate Institute of Australia, whose member agents, funnily enough, get the same commissions regardless of whether they sell new or established homes!

Nevertheless, in the new year, we'll be back to a $7,000 subsidy for every sale of a new or established home to a first-time buyer.

If the FHOG had been limited to new homes from the beginning, the stimulus to construction and the consequent faster growth in supply would have slowed the inflation of the housing bubble. But it wasn't.

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Neither was the negative gearing deduction or the 50 per cent discount for capital gains. This broad-spectrum neglect of the supply side gave us the highest ratios of median home prices to household disposable incomes, mortgage interest payments to household disposable incomes, and debt to annual GDP, in Australia's history. Measured against household income or against historical norms, our housing bubble was bigger than America's. And America's had burst.

Between the last quarter of 2007 and the first of 2008, sales of established homes in Australia's eight capital cities fell more than 20 per cent. Prices declined through 2008. The crash was on.

Observing the fallout from the US crash, the Australian government threw money at the housing market by introducing the Boost. To the extent that the Boost stimulates construction and hence the industries upstream and downstream therefrom, it maintains income and hence spending power, which is the ultimate long-term support for property values (although a broader employment stimulus like that described in my last article in On line Opinion would be more effective, more sustainable, and less dependent on continued demand for housing). To the extent that the Boost is ploughed back into values of established homes, leveraged by high loan-to-equity ratios, it tries to avoid the hangover by staying drunk.

It seems that the latter effect has been dominant; stratified data on home prices show an uptick starting at the bottom of the market and spreading to the top, suggesting that first-time buyers leveraged their grants, and that vendors who sold to them leveraged their capital gains, and so on. You can't unburst a bubble, but you can inflate a new one within the shattered shell of the old - until the new one bursts too.

It's possible that the new bubble has enough speculative momentum to defy the withdrawal of the Boost, but only for a time. That the RBA started raising interest rates just five days after the government started withdrawing the Boost is an indication of how short-lived the new bubble could be.

When it bursts, a decade of "first home owners' grants" will be exposed as a debt-leveraged transfer of funds from the asset-poor to the asset-rich. And because all this has allegedly been done for the benefit of the asset-poor, they will be deemed unworthy of any bailouts, which will go to lenders and depositors instead.

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About the Author

Gavin R. Putland is the director of the Land Values Research Group at Prosper Australia.

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