Shareholders in banks with large down-market home lending portfolios should fasten their safety belts if the Federal Government substantially reduces the first home buyer grant after 30 June.
Over the weekend I poked a few sticks down burrows in the first home buyers’ field, and while I found nothing like sub-prime it was clear that some banks have been very generous in their lending criteria, enabling people who would not have otherwise been able to buy a home to do so.
The “first home buyer” bank lending positions stand in stark contrast to the Sydney apartment market, where the biggest apartment owner, Meriton’s Harry Triguboff, complains of very tough lending criteria.
Triguboff, who obviously has his own biases, explained to Business Spectator that the level of bank lending for apartments has created a low market price for apartments, which made in it uneconomic to build new high rise dwellings. Accordingly, people were simply crowding into apartments or other residences, or leaving the city.
The human aspect of the Triguboff remarks was described in The Australian today. People are not happy going back to their parents or inviting one or two more people into an apartment to pay the rent.
Returning to the first home buyer grant, the combination of the high grants and generous bank lending has done what those forces always do – push up the price of lower-priced houses. But at the higher prices there is feverish building activity, which is exactly what the Government wants to stimulate the economy.
If the grant is reduced – and I emphasise that I have no knowledge of whether or not it will be – and, in addition, Nick Sherry’s new lending bill is enacted later in the year, then there will be a double whammy on the lower priced end of the housing market.
The value of lower priced houses will fall and at a time of rising unemployment. Lots of people will lose their homes, but for those that have outlaid very little there is no huge financial loss apart from the very real emotional disappointment.
When you put sticks in burrows you come up with odd situations that may not be indicative of the total scene. What I am doing is alerting the capital community of the bad debt danger.
The debate as to whether the Government should or should not reduce the first home buyer grant will rage in the days leading up to the budget. I am not making a stand, except to say this – when you make a grant of that sort it should be obvious that you will create a demand for houses. If you withdraw the grant at a time of rising unemployment you will cut that demand, reduce housing prices, and frighten away the banks.
Arguably such a grant should never be set up, but for all its sins (and there are many) the first home buyer grant is one of the more efficient ways of stimulating the economy because, with bank support, the impact is multiplied many times. It is a lot more effective that the Rudd money that falls from the sky.
Unfortunately the grant is like a drug – if you stop giving it, there are terrible withdrawal pains.
This first appeared on Business Spectator
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