No matter who wins the election tomorrow, it seems the government is going to become guarantor to a new bunch of soon to be debt-laden first home buyers.
The bank of Mum and Dad is to be replaced by the Bank of Scott or Bill.
The new scheme, announced by Prime Minister Morrison earlier this week and matched by Bill Shorten, will allow first time home buyers to purchase a house with only 5% deposit.
The government will guarantee an additional 15% of the home’s value to get the banks’ exposure down to a more palatable 80% loan-to-valuation ratio (LVR).
The mechanics are still not clear on how this will work exactly.
But the upshot is young people will be able to join the property frenzy sooner, without having to save up as much deposit.
Excuse my French, but what the France are they playing at?
Do they not remember the ‘no money down’ deals that helped caused the GFC in America?
Such government intervention into markets always has adverse consequences down the line.
I talked about this last Friday. How trying to stop the natural business cycle — the natural ups and downs of markets — was very dangerous. It creates a situation where governments dictate winners and losers, rather than free markets.
And how even well-meaning attempts to create more fairness — such as giving first home buyers a boost — actually leads to more unfairness down the line.
This ‘liberal’ policy is pure big government. No wonder the labour party jumped in to match it so quickly.
But you know as well as I do why they’re really doing this…
A house of cards
You know the best way to help first home buyers buy a house?
Let the natural features of supply and demand take effect. Get government out of the way and stop creating interest rate driven economies.
A bit of wage growth wouldn’t be bad either.
Do this and there’ll be ample eager buyers for retiring baby boomers to sell down some of their property holdings into and help fund their retirement.
Maybe not at the extremely high price levels we’ve seen in recent years.
But certainly, at healthy profit levels over home prices ten years ago. A win-win for all but the most speculative of recent buyers.
Sadly though, the housing market is one of the most political — which means manipulated — markets out there. And the new first homeowner scheme was just the latest in a long history of government policies designed to boost housing prices.
Prime Minister Morrison’s announcement was also an attempt to offer a carrot to a constituency of young voters they were offering little to so far.
But at a deeper level it was a ‘wink, wink, nudge, nudge’ to current property owners. A signal that ‘the government has your back’ when it comes to propping up house prices.
As reported in Domain:
‘While the scheme would enable first-home buyers to get onto the property ladder faster, there are concerns it will encourage them to take on more debt and drive up prices — ultimately making it more expensive — at a time when the lending practices of banks have been under attack.
‘“Policies like this tend to drive up prices,” said EY chief economist Jo Masters. “First-home buyers … will be able to borrow more than they would have done otherwise, it will generate demand in a sense and bring prices up.”’
And there’s the real motivation. Our reliance on ever increasing property prices to create wealth.
The fact is Australia’s economy is built on land.
Some if it is dug up and sent to China in the form of iron ore, coal and other resources, the rest we build houses on at ever inflating prices so we can tell ourselves we’re rich.
And as long as the red dirt keeps getting shipped off to China, this façade of growth mostly works.
That in turn lets the Australian government — of all persuasions — work hard at keeping the property myth going.
I don’t think a change of government by itself will cause any problems for property prices, despite the partisan rhetoric saying otherwise.
The real problem for property prices will be if this happens…
Sting in the dragon’s tail
Take a look at Australia’s top exports.
Eight of our top ten exports are commodities — with iron ore and coal worth more than the rest of the top ten combined.
This is how we as a country generate our wealth.
These exports create demand for Australian dollars — they need these to buy our exports — which in turn lets us buy cheap stuff from overseas (because it props up the relative value of the Aussie dollar). This also allows us to attract foreign investment (loans) to help us borrow more for housing.
You see how circular this relationship is on many levels?
And it all starts from our exports…
All this money from resources exports filters out into the economy and inevitably lands in Australia’s favourite asset — property.
As property prices rise, and credit spills out, a natural feedback loop magnifies this process. Property prices up, credit growth up, property prices up and so on and so forth.
George Soros — the famous macro trader — called this process reflexivity. How a change in beliefs about reality actually changed reality too.
Don’t believe it’s as simple as that?
Let me show you…
Check out world house prices post-GFC in 2008…
Source: Macro Business
The pullback in Australian property prices (black line) in 2008/09 was barely a blip compared to other comparable countries.
Now look at this chart of the top 100 resources companies index on the ASX.
Source: Incredible Charts
See that resurgence in resources stocks from the lows of 2008 through to 2011.
That was due to the huge Chinese stimulus package to support their own economy in 2009. Australia’s resource exports benefitted immensely from that, which in turn supported property prices.
Sure, the RBA cutting interest rates helped too. But they did that in the USA, Ireland and elsewhere without the same reaction in property markets.
It was the continuing demand for our resources that underpinned the resurgence in property and in turn the economy.
This is why whoever wins tomorrow, the real risk to property prices in Australia, remains with the decisions of a different bunch of pollies — the Chinese government.
It’s the dirty little secret our own politicians never acknowledge.
Because if they did, they couldn’t take the credit — or apportion blame — for changes to the wealth of Australians.
So regardless of who wins tomorrow, when it comes to your investments and your property value, I’d pay more attention to China — and our exports to it — than anything else.
Contributing Editor, Markets & Money