Have you not seen the ads urging first home owners to buy on zero deposit, legals or stamp duty, because the FHOG covers all that. Together with ads from home wares retailers on zero deposit, no payments for 5 years. Have it all now? pay later?

Economic Stimulus has only delayed the crash until after an early election can be called.

But negative gearing isn’t the only tax distortion to consider. What about the Capital Gains Tax? This tax took ten years from its inception to start having an effect on home prices (the opposite effect of that intended) because other factors needed to fall into place like the minerals boom. But it provided property-speculator spruikers a great reason to convince fellow speculators to buy and hold in certain markets, rather than selling after a few years as they used to. New (and in my opinion incredibly risky) investment models evolved in response to the CGT in which you can make money by leveraging off increased equity without ever selling a single property. It works best if many other speculators are doing the same thing, because together they reduce the available pool of properties for sale and thus the supply-demand imbalance. That’s why the proportion of investor-owned to owner-occupied houses (not just apartments) has risen in the last ten years. So of course, not very much CGT is actually collected on properties.

A fair policy option to consider would be excluding all residential property from Capital Gains Tax. This would allow speculators hit by hard times to exit cleanly and realize most of their capital gains. It would also increase the available pool of homes and thus help home buyers. Of course there is no free lunch; owners who choose not to sell would see a temporary drop in their beloved home prices. But owner-occupiers would also be able to move paying tenants into their homes without crossing over into CGT territory. There’s no absolute win-win available in the cutthroat property market, but excluding homes from Capital Gains Tax may be the next best thing.

But back to FHOGs… Two queries:
1) What was the average house price when Howard introduced the FHOG? What is it now? And how does that annual growth rate compare to increases in wages / GDP / etc over the same period?
2) Does it not seem strange that the size of an average FHO mortgage is now HIGHER than an average non-FHO mortgage? Why would the demographic that has negligible equity, lower-paid jobs and greater risk of unemployment be gearing themselves up to a higher level than the rest of the population? It wouldn’t have anything to do with the free carrots being dangled in front of them, would it?

No government wants to be in power when the sh*t hits the fan and Rudd knows this only too well.

M

Notice how Kevin Rudd quietly dropped barriers to overseas investment in Australian residential property over Christmas? How about the fury of Wentworth voters/homeowners in 2007, holding John Howard responsible for the drop in their local values? (See the Australian, 16/07/2007 http://www.theaustralian.news.com.au/story/0,25197,22080703-2702,00.html).

Think of high prices as another form of borrowing from the future for economic stimulus now. Retirees live it up today, newlyweds work off the debt in years to come, before passing it on to tomorrow’s children, and so on. Almost all the losers are children or still unborn - not a lot of voters in that lot!

The problem with looking at just LVR is as you point out its a bit circular as the inflated values support a greater debt. The feedback loop creates wobbly valuations. But income vs loan is absolute - do you have data on the trend in that?

I’m not predicting this, but if some major unforseen external shock hits and we get unemployment and falling real incomes then that will be the double whammy. The Ascent of Money series pointed to various wars, oil shocks etc that have triggered this. “Nobody expected Spanish Inquisition….”