“All good things must come to an end”.

Well apparently, all good things except for policies which may could earn Kevin Rudd a couple of votes at the next federal election. And so the Prime Minister has resolved in Tuesday’s budget to extend the First Home Owners “boost” until 30 September, with the amount being halved to $3,500 and $7,000 (for established and new homes respectively) until the end of the year.

As Crikey has previously pointed out, the First Home Owners Grant (originally devised by the Howard government but doubled by Labor last October) is a policy which significantly inflates the cost of property for first home buyers, and mostly benefits wealthy property investors and developers. It appears the mainstream media is finally catching on, with the Financial Review noting this morning that “buyers who would previously have been unable to afford a deposit are now pushing prices beyond [their limit].”

The AFR also quoted Colliers International director of Research, Rory McLeod, who stated:

The boost to the first home buyers’ grant is a good thing for brand new homes because it stimulates construction and therefore jobs, but I don’t think the grant boost for purchasing existing houses is a good thing because all it does is artificially inflate prices and create an artificial bubble in the lower segment of the market.

McLeod is spot on with his analysis of the effect of the grant on established properties — while high-end property prices have plummeted (by upwards of 30% in some suburbs), ‘affordable’ property has continued to increase in price, despite unemployment rising and growth stalling. In the past year, first home owners have gone from making up 12.1 percent of housing finance commitments to 26.9%. That is almost entirely due to the effect of the boosted FHOG, coupled with banks still lending to young buyers on loan-to-valuation ratios of up to 95%.

Not only is the grant a disaster for those purchasing established homes, the benefits for the grant on new properties is also questionable. There is no doubt the boosted grant has allowed property developers to widen (or at least maintain) profit margins, and the FHOG probably saves existing construction, but that doesn’t mean it is necessarily a good thing. You can undertake a Keynsian-style fiscal policy and create jobs by paying someone to dig a hole and then fill it in, the only problem is such a policy is grossly inefficient and is detrimental to society as a hole (no punt intended, but beneficial to the hole-digger). By arbitrarily transferring wealth from taxpayers (or future generations) to property developers and construction workers, the Government is propping up one sector of the economy which should otherwise be shedding workers, improving efficiencies or going broke.

Meanwhile, we noticed a graph which should make every property owner (and especially those who have recently entered the market) shudder in fear. The Daily Reckoning noted the graphic produced by the Who Crashed the Economy website yesterday, which produced the following real price index, comparing Australian property prices with those in the United States (adjusted for inflation since 1890):

What the graphic indicates is that between 1890 and 1970, property prices in the US and Australia roughly tracked the level of inflation. Since then, property prices in both the US and Australia increased at a far higher rate than inflation (and economic growth) — largely due to increased use of leverage. While US prices have adjusted sharply in the past 18 months, Australian property prices have continued to rise — in real terms doubling since 1997. (The data for the graph came from Robert Shiller, the renowned Yale economist who created the Case-Shiller property price index in the US and Nigel Stapledon, who is a former Chief Economist for Westpac and currently an Economics Lecturer at the University of New South Wales).

There are two ways to look at the information. Either Australian property is unique and due to supply shortages and Australians love of home ownership, property isn’t overvalued, despite it increasing at three times the rate of inflation in the past 40 years and being historically double the level when compared to incomes. Or more likely, Australians have been fooled into paying far too much for property using excessive debt and aided by imbecilic, yet populist, government policy, such as the First Home Owner’s Grant and negative gearing.