The Real Winners of the First Home Buyer’s Scheme

It’s not even a secret anymore…

It appears the only plan to grow the Australian economy is to keep Australia’s property party chugging along.

The government are dishing out the equivalent of ‘Schedule I drugs’ in an effort to spur partygoers — err, I mean prospective home owners — to join the fun.

It started straight after the election…

Within months the regulator APRA — fresh from the results of a scathing royal commission — bowed down to government pressure and reduced the minimum servicing rate.

This was the 7% interest rate banks previously used to assess borrower affordability when it came to new loan applications.

The new rule is for banks to assess loans at the actual interest rate ‘plus 2%’. A substantial boon to borrowing, especially given this next point…

The second post-election stimulus plan for home prices — reducing interest rates.

Check out this graph:


Money Morning

Source: RBA

[Click to open in a new window]

After three years of no change to interest rates, the official rate has fallen by almost 50% since the general election.

This is an intended outcome from the government and is the reason for their repeated declarations of going for a budget surplus (over any overt spending plans).

They’re trying to shift the heavy lifting on the economy to the RBA, knowing that all they can do is keep reducing interest rates.

The intended consequence?

Rising house prices…

Then there’s the latest move in this great Australian property Ponzi — the now revamped first home buyer’s scheme (FHBS).

The scheme allows first home buyers to get into the market with as little as a 5% deposit.

The government will guarantee the difference to the standard 20% down payment.

As more details emerged yesterday of this election promise, it became clear which bunch of Aussies were likely to gain most here…

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It certainly isn’t first home buyers…

The design of the new Morrison FHBS is a carefully crafted one. Sneakily so, almost.

First up, the attempt to keep the frenzy going…

Every Ponzi scheme needs fresh meat, otherwise it dies.

In Australia, first home buyers are the perfect target. Because they’re the most desperate to get in. Young families see the chance of buying a home slipping away as prices rise and become desperate to buy anywhere at any price.

Others see the ‘guarantee of wealth’ property has brought their parents (and peers) and are desperate not to miss out.

It’s classic FOMO as the youngsters call it these days (fear of missing out).

With that in mind, consider this aspect to the FHBS…

The scheme is capped to 10,000 Australians per year.

Why put a cap on how many people can access a government incentive?

In what other government policy is there a cap?

Do tax refunds only apply to first people to hand in a tax return? Do age pensions only apply to those lucky enough to turn 65 in the first half of the year?

The aim of this capping is obvious. To feed the frenzy. By capping it, it creates an atmosphere of rush.

You can hear the real estate agents now — ‘Get in before it’s too late, don’t miss out, it’s only the first 10,000!’

Like I said at the start, the government aren’t even hiding it…

There is no specific number of guarantees per jurisdiction, it will be on a first-in-best-dressed basis,’ the finance minister, Mathias Cormann, told Sky News on Sunday.

But this is where the second part of the scheme is interesting…

You see, the scheme has price limit caps too. They’re tailored to each region. So, for Sydney it’s $700,000 and for Melbourne $600,000.

What’s the real reasons here then?

Well, there’s not many places you can buy a house in Sydney or Melbourne under those prices.

That’s because the real aim is to boost demand for inner-city apartments.

Fresh from the shoddy construction scandals of the likes of Mascot Towers in Sydney, there’s a real danger the apartment market tanks.

And with it, tens of thousands of construction jobs. With the further risk of a contagion effect into the wider economy and then, shock, horror, the housing market too.

By capping the price limit, the government is trying to increase buying demand for the fragile apartment market.

The property council even said as much!

From the AFR yesterday:

Property Council of Australia chief executive Ken Morrison says it’s important the settings are right for off-the-plan apartments or house-and-land packages.

“The scheme comes at a time of declining construction levels for new housing which has an impact on jobs, housing affordability and supply,” he said in a statement.

There’s no doubt about it, this government will do everything in its power to keep the property Ponzi going…

Where it could go wrong

Now, you might be reading this and be thinking, perhaps it makes sense.

If you’re a property owner, you might even welcome these moves. After all, who doesn’t want to see their home increase in value?

But for my part, I think this will end in a monumental disaster…

If history has taught us anything, it’s that government interventions distort markets badly. And such distortions eventually come back to bite.

The bigger the interventions, the bigger the bubble. Meaning a collapse could be catastrophic.

The only real question in my mind is when?

When will this house of cards come toppling down?

It could be soon, or it could be years or even decades away. That’s the gamble home buyers have to weigh up today. And it’s not an easy decision, I know.

After all, no one wants to be a party pooper — the one not to join the party!

The pressures to join are immense, and in the short term the government will likely get their wish of rising property prices.

The kitchen sink will be thrown at the first signs of slowdown.

Which means it’ll likely be an external event that spells the end. A recession in China, a financial crisis, or anything that leads to an increase in unemployment.

If and when that hits, no government scheme will save this two-decade Ponzi scheme from collapse…

Good investing,

Ryan Dinse,
Editor, Money Morning

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Ryan Dinse is an Editor at Money Morning. He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur. With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle. Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.  


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