All - an article today in The Age by Steve Keen. I fully agree with him. Maybe it is time for a little short term speculation? This will push prices up for a little while if they actually go ahead with it. No change to my long term view though.
http://www.theage.com.au/news/business/a-loselose-election-for-home-buyers/2007/11/14/1194766769163.html
**************
If both parties keep their promises, the affordability crisis for first-home buyers will worsen, writes Steve Keen.
BOTH Liberal and Labor housing policies will make Australia's debt and housing affordability crises worse. The only difference between the two is how much damage they will do.
Both parties have promised tax-advantaged savings systems that will enable first-home buyers to accumulate larger deposits. This will help them compete with other buyers in the housing market, but the problem isn't a lack of competition among buyers. The real problem is that we've driven house prices far too high by devoting far too much borrowed money to buying houses. By increasing deposits while doing nothing about loans, both parties will only add fuel to the fire.
The ALP gives the example of a two-income family, earning average wages, who could increase their deposit by $18,000 as a result of its scheme (and the Liberals' scheme is much the same). That looks good on paper. But without any change to lending policies, that larger deposit will simply be used to secure a larger loan — up to $360,000 larger, if Mr and Ms First Home Buyer try to buy a house with a 5 per cent deposit.
Of course, no lender would offer such a loan — because even with an 8 per cent home loan rate, interest payments would consume 140 per cent of their gross income. But they could easily be offered an interest-only loan equivalent to 85 per cent of the purchase price, with repayments of 47 per cent of their income.
And what would that do to home affordability? Make it worse, of course. A fair slab of their increased purchasing power would be eaten up by yet higher prices, driven by ever higher household debt.
The Liberals' scheme is even worse, because it adds three more logs to the house-price fire — it allows relatives to contribute up to $1000 a year to the savings account, it lets relatives take an equity stake in the first-home buyer's house, without being liable for capital gains tax on its sale, and it promises to use future government surpluses to top up these savings accounts.
We have already achieved the world's most unaffordable housing with loans that are based solely on the incomes of the borrowers. This proposal would throw parents' income and government savings into the mix, and therefore push mortgage debt beyond its already astronomical level. It's a silly step towards the madness that marked the peak of Japan's ill-fated "bubble economy" in 1990, when lenders briefly offered 99-year mortgages.
We thus face a choice between a bad housing policy and an almost insane one. I hope that neither represents what either party really thinks is needed, but is instead a product of this "me too" election campaign, where each side is afraid of suggesting a policy that can be "wedged" by its opponent.
With the parties offering us a Hobson's Choice on housing in this election, the best we can hope for is that whoever wins ditches their campaign promise and instead develops a policy that restores some parity between mortgage debt and income — perhaps by limiting loans to some sensible multiple of the rental income a house can be expected to generate.
Steve Keen is associate professor at the school of economics and finance, University of Western Sydney.
http://www.theage.com.au/news/business/a-loselose-election-for-home-buyers/2007/11/14/1194766769163.html
**************
If both parties keep their promises, the affordability crisis for first-home buyers will worsen, writes Steve Keen.
BOTH Liberal and Labor housing policies will make Australia's debt and housing affordability crises worse. The only difference between the two is how much damage they will do.
Both parties have promised tax-advantaged savings systems that will enable first-home buyers to accumulate larger deposits. This will help them compete with other buyers in the housing market, but the problem isn't a lack of competition among buyers. The real problem is that we've driven house prices far too high by devoting far too much borrowed money to buying houses. By increasing deposits while doing nothing about loans, both parties will only add fuel to the fire.
The ALP gives the example of a two-income family, earning average wages, who could increase their deposit by $18,000 as a result of its scheme (and the Liberals' scheme is much the same). That looks good on paper. But without any change to lending policies, that larger deposit will simply be used to secure a larger loan — up to $360,000 larger, if Mr and Ms First Home Buyer try to buy a house with a 5 per cent deposit.
Of course, no lender would offer such a loan — because even with an 8 per cent home loan rate, interest payments would consume 140 per cent of their gross income. But they could easily be offered an interest-only loan equivalent to 85 per cent of the purchase price, with repayments of 47 per cent of their income.
And what would that do to home affordability? Make it worse, of course. A fair slab of their increased purchasing power would be eaten up by yet higher prices, driven by ever higher household debt.
The Liberals' scheme is even worse, because it adds three more logs to the house-price fire — it allows relatives to contribute up to $1000 a year to the savings account, it lets relatives take an equity stake in the first-home buyer's house, without being liable for capital gains tax on its sale, and it promises to use future government surpluses to top up these savings accounts.
We have already achieved the world's most unaffordable housing with loans that are based solely on the incomes of the borrowers. This proposal would throw parents' income and government savings into the mix, and therefore push mortgage debt beyond its already astronomical level. It's a silly step towards the madness that marked the peak of Japan's ill-fated "bubble economy" in 1990, when lenders briefly offered 99-year mortgages.
We thus face a choice between a bad housing policy and an almost insane one. I hope that neither represents what either party really thinks is needed, but is instead a product of this "me too" election campaign, where each side is afraid of suggesting a policy that can be "wedged" by its opponent.
With the parties offering us a Hobson's Choice on housing in this election, the best we can hope for is that whoever wins ditches their campaign promise and instead develops a policy that restores some parity between mortgage debt and income — perhaps by limiting loans to some sensible multiple of the rental income a house can be expected to generate.
Steve Keen is associate professor at the school of economics and finance, University of Western Sydney.
