Government Intervention

Boy, don’t governments just love to meddle in stuff. Good intentions and unintended consequences – it’s the staple of governments the world over. Well-intentioned as most of it is, you can count on the fingers of one hand the number of instances where governments have intervened in something or other (markets in particular) that have had sustainable long-term benefits. Indeed, in most cases, intervention in markets has led to long-term damage, but will they ever learn? Now that Australia’s property market is well and truly on notice, the government’s increase in the First Homebuyer’s Grant to $21k during the GFC, is about to come under the spotlight.

Firstly, I think it’s fair to say that this action was designed to benefit property developers and not first home buyers – this much is obvious. But, why was this intervention such a bad thing? Well, interest rates at the time were about the lowest they’ve ever been in recent history – the cash rate at 3%. Wouldn’t the cheapest mortgages this generation has ever seen be enough to stimulate demand on its own? Apparently not.

The FHG was a straight-up taxpayer gift to many (better-heeled) first home-buyers but allowed an entirely new group of people i.e. those who were simply incapable of saving a deposit in the first instance and could just about afford a mortgage with cash rates at 3%, to get onto the housing ladder. But there is a nasty unintended consequence to this seemingly noble act by the Rudd government.

Fast forward to 2011 and cash rates are now 4.75%. It’s only 1.75% more, I hear you cry, what’s the big deal? The big deal is that it’s not the absolute increase that’s the issue, it’s the relative increase that matters i.e. a 58%! Adding in the banks’ synchronized (cartel, anyone?) raising of mortgage rates an additional 0.25% and 0.40% at the end of last year, and you can easily arrive at an all-in increase in mortgage cost of 30%+. That’s massive.

 The increase in financing costs is significant, particularly to the marginal borrower. So, it’s not a stretch to believe that a large portion of this group who just managed to squeeze onto the housing ladder before costs ramped up -- not to mention fuel, food and utility costs, since – will be “doing it tough” right now. Fact is, a significant proportion of this group will be delinquent even as we speak, putting further supply-side pressure on the market over the coming years and causing untold misery for those who took out these full-recourse loans.

So then, as a tax-payer, marks out of ten please for the government’s stellar intervention in providing short-term succour for developers and long-term pain for a whole swathe of hard-working Aussies ….. not to mention the contribution this action will make to the severity of the property downturn.

P.S. Comment on the carbon tax and Gillard’s proposed teacher bonus scheme to follow