Federal Treasurer Wayne Swan made a truly remarkable statement to Channel Nine last weekend which went virtually unnoticed. When commenting on the boosted first home owner’s grant (which is currently $21,000 for new homes and $14,000 for existing homes) Swan claimed that “to pull that stimulus out now would be to pull the rug from underneath recovery [and the boosted First Home Owner’s Grant is] an important thing because it is supporting asset values in a critical area.”
If there were any dispute about Swan’s economic credentials to run Australia’s trillion dollar economy, it was solved by those comments. If Swan believes it is the role of the government to “support asset values” he may be a fine politician, but he makes a terrible Treasurer.
In an allegedly free-market economy, it is not the role of the government to prop up over-priced assets — especially an asset as critical to millions of Australians as housing. By ensuring asset prices don’t fall to their intrinsic value, the Federal Government is ensuring that first home buyers are over-paying for assets, possibly locking themselves into a lifetime of near unserviceable debt. (Most Australian’s, especially younger ones, would benefit from falling house prices — it is only those planning to sell their homes, or those foolish enough to lend without sufficient security who are adversely effected by falling prices).
Australia’s housing market, on a relative income basis or debt-service basis is among the most expensive in the world. When compared to the United States, on a median income-media price measure, Australian property is more than twice as expensive as property in the US. No doubt, supply issues have been a leading short-term influence on prices, as have overly permissive bank lending policies, however, it is boosted the first home owner’s grant which has led a remarkable housing recovery in the past six months. (The “first home buyer” share of financing committed has tripled to a record 30% in recent months). In fairness, the Rudd Government cannot be blamed entirely for the FHOG, the original grant was the creation of the great spendthrift John Howard in 2000 to offset the GST.
While the Federal Government’s stimulus-at-all-costs mentality has managed to Australia technically out of recession (albeit not on a per-capita basis), it has also significantly expended public debt levels (courtesy of more than $20 billion in cash handouts). As Malcolm Turnbull noted in Fairfax papers, Australia’s stimulus in relative terms was the third highest globally, behind only the US and South Korea.
However, not only has the Federal Government undertaken a gigantic borrowing binge that would make Keynes blush, but that spending has not been primarily directed at creating future capital investment, instead, it was handed to low-medium income earners, or directed to the pockets of vendors selling properties to gullible first home buyers. (If you’re wondering where those $900 stimulus payments went, the Victorian Commission for Gaming Regulation noted yesterday that poker machine revenue was 4.7% higher in May than the corresponding period last year — the highest increase since 2004).
While Melbourne and Sydney’s public transport systems burst at the seams, and much of the country remains crippled by drought, our Treasurer considers it most prudent to ensure that taxpayer monies are directed at ensuring an already inflated asset class is not able to return to its intrinsic value.
Kevin Rudd and Wayne Swan are neatly proving the schoolyard rule that the popular kids usually aren’t the smart ones.