Housing Affordability

Or “Justin makes idle chit chat with mortgage brokers all day and comes to conclusions about things.”

Interest rate rises and skyrocketing housing prices are making it more and more difficult to service a mortgage, and indeed to get one in the first place. Over the last couple of days Prime Minister Rudd has said he’s going to tackle it, but hasn’t specified exactly how (maybe we’re importing land from the Moon?). Either way there’s been plenty of stupid suggestions, so it’s been hard to choose just one to rail against, but after reading this story I think I’ve found a clear winner:

The REIA advocates doubling the First Home Ownership Grant (FHOG) as a short-term measure to assist potential buyers out of rental into home purchase.

“With the First Home Owner Grant pegged at $7,000 for the past eight years, despite house prices doubling in that period, it no longer provides the support required for first home buyers”, Mr Dyett said in a statement on Monday.

The problems here are thus:

1. There are two reasons you need to place a deposit on a house. The first one is so that the Loan-to-Value Ratio (look it up) is below the appraised value of the house in case you default on the loan, so that the bank can take the house and sell it to recoup the entire balance owing, even if it’s dropped in price. The second is that it proves you can exercise self control and put money aside every week for a significant period of time, much the same as you’d be doing when you’re servicing the loan. If you can’t do this, you probably can’t service the loan, and as such paying large parts of people’s deposits for them will increase the number of people who default on loans (hint: loan defaults are what caused the sub-prime crisis). There are other reasons for having a deposit such as stamp duty and mortgage insurance, but there’s no need to elaborate on those here.
2. When you have 2 or more people with their first home buyers’ grants turning up at an auction, they’re each going to bid significantly higher than they already would have without the grant (duh, cause they have more money to spend). With an average 10% deposit and a $7000 grant this means up to a $70 000 jump in prices at such auctions, which drives housing prices up, makes it harder for anyone else to buy and makes the weekly repayments of the first home buyer higher as well. Doubling the grant only exacerbates this problem.
3. At certain stages of your life you should be renting, and there’s nothing wrong with that. If you’re pushing people who should be renting into buying, you’re just making it harder for the people for whom it’s more effective to own a home.

Moral of the story is that, aside from releasing more land for residential purposes, there is no way you can use government intervention to make housing more affordable across the board, and I’m hoping to Jesus that Kevin Rudd realises this.