Those who thought that the gradual reduction in the first home-owner’s grant in September would cool the first home-buyer market have, for the time being, been proved mistaken.

The Financial Review reported that despite the federal largesse being halved, young buyers continue to flock to the market. In Victoria alone, more than 49,000 grants have were provided in the year to November — a rise of 46% on 2008 (which itself was 28% above 2007). The figures in NSW are equally startling, with more than 66,000 first home-owner’s grants being given — up 67% from 2008.

While the federal government is phasing out its “boosted” grant (reducing it to $10,500 and then $7000 next year for established homes), its stupidity is being replaced in part by eager state governments, happy to fill the breach to ensure that young home buyers are saddled with massive debt burdens after acquiring their first property. Federally, for new properties, the grant was reduced from $21,000 to $14,000 in September, before dropping to $7000 on 1 January 2010.

However, in Victoria buyers are able to receive a further $2000 for established properties, $11,000 for newly constructed homes and a further $4500 for new homes outside the metropolitan area. NSW has its own (slightly less generous) scheme, which provides a $3000 grant and discounted stamp duty.

In Victoria, therefore, the buyer of a newly constructed rural home who is utilising a loan-to-valuation ratio of 90% would be able to increase their purchase price by more than $250,000 (depending on a few other factors such as income levels). The additional purchasing power for established properties is less, but still substantial. NSW buyers will receive about $100,000 more in buying power using a 90% LVR and the various grants.

As this column noted in October 2008 — the time the FHOG was increased, any boost would be utterly useless to actual home buyers. In fact, the boost would be detrimental — serving to “bid up” the price of homes and force buyers to assume greater debt burdens (the boost was aptly named the First Home Vendor’s Grant by Steve Keen). Former ANZ economist Saul Eslake told the AFR that “money poured into the pockets of buyers looking for existing home was wasted and served only to increase prices in the established housing market.”

Eslake, however, claimed that the grant for new homes had more value, noting “given the continual problem with Australia is a lack of supply, anything that brings forward supply is prima facie a good outcome”.

We would suggest improving property developers profit margins (which is essentially what the grant on new homes achieves) may lead to increased supply, but for the wrong reasons. A preferable way to increase supply would be to reduce zoning limits applied by many local councils (the number of units able to be built has been substantially lessened in recent years). Giving a Keynesian-style stimulus to a certain sector will provide short-term benefits, but as with the cash-for-clunkers program in the United States, the effect will be reduced to almost zero as soon as the stimulus ends.

None of this appears to be bothering Victorian treasurer John Lenders though. Lenders told the Financial Review that “Victorian are still buying first homes in record numbers even after the federal government wound down the extra boost”. Lenders probably should have added that thanks to state government policy, young families are assuming more debt than ever before with interest rates and unemployment at historical lows.

Peter Fray

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