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First home grant could lead to Aussie sub-prime

Discussion in 'The Economy' started by Tropo, 18th Mar, 2009.

  1. Tropo

    Tropo Well-Known Member

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    First home grant could lead to Aussie sub-prime
    18/03/2009

    The federal government's increased first home owner grant could encourage into the market some who may not be able to afford home ownership according to the chief executive of the Commonwealth Bank.
    "The first-home buyer grant has provided a stimulus to this point, but we have to be careful that this doesn't become a situation where this is an open-ended offer," Ralph Norris said.
    "All of us [have] had to make sure we're lending responsibly to first-home buyers."

    Norris called on the government to ensure that the increased grant did not become a permanent feature of the market.
    He noted that the sub-prime mortgage crisis began in the US as a result of lending to people who could afford to repay their loans.
    The global financial crisis is moving into the next wave with economic conditions in Australia set to deteriorate further said Norris yesterday.

    Source: Sydney Morning Herald
     
  2. samaka

    samaka Well-Known Member

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    Possibly. Certainly it will encourage first home owners (like me - settling next week!) to jump in, especially with such low interest rates.

    However one of the problems with the USA was that there was no recourse for the lenders - all they get is the house. Banks aren't going to to be stuck with bad assets only. Worse case scenario is that they sell the house, borrower can't repay and has to declare bankruptcy.
     
  3. Jacque

    Jacque Team InvestEd

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    Tightening lending criteria is already making this a reality. Take CBA for example, now demanding minimum 3% cash savings (not including grant) from FHB's with a track record of at least 3mths demonstrated savings. It's a small start but I think it's timely.

    These grants shouldn't be relied upon as being a permanent fixture of our housing market- I wouldn't be at all surprised if the boost gets the boot come end of June now.
     
  4. Chris C

    Chris C Well-Known Member

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    I have been saying for a couple of months now that there is a real issue that we could be creating our own property crisis by offering more incentive to FHO's via the doubling/tripling of FHOG's during this turbulent period of VERY low rates and rising unemployment. I'm very scared to think that with the potential for rapid inflation being a very real risk at the end of this world recession will only increasethe potential for rapidly rising rates after a period of low rates with many new FHO's taking the oppurtunity to leverage themselves very heavily into their new homes thinking they are making a smart move.

    I think this whole thinking of "but the US is different because of non-recourse loans" is far too often taken out of context and pushed by the media. The research I have done into the topic suggests at only SOME states in the US allow non-recourse loans, albeit it that these loans were often found in states that have been more greatly affected by property price falls, but the majority of states offer recourse loans, and despite this have still seen massive property price falls, foreclosures and ultimately bank closures.

    This idea that this crisis can't happen here is really just wishful thinking that doesn't have any basis in reality. Though I will say the fact that our recession is lagging the rest of the world allows individuals, businesses and policy making to bunker down and prepare for the worst.

    We are already seeing the CBA make moves to allow those that lose their jobs in the upcoming recession to get exemption from making mortgage repayments and the bank delaying foreclosure given that in the current climate the CBA has little incentive in seizing an asset that they can't sell for a reasonable value in the current market. This policy may actually go a long way to propping up the housing market during this tough period.
     
  5. rambada

    rambada Well-Known Member

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    My niece is applying for her first home loan right now, and my son purchased in January. Lending criteria by the banks has definately tightened. Not only that but the limited income of the majority of first home buyers is going to limit any 'boom'. Supply below $400k is drying up hugely - so time/inflation/wage rises for these buyers will be there capital growth impitus. Anecdotely I am not picking up on much chain effect from this grant this time around. People seem to be hunkering down and those already in a house are keeping that mortgage low and not upgrading. I am also picking up on a lot of first home buyers are into ex rentals in the established market - makes for interesting IP/rent prices.
    And the top end of town is falling. Very interesting times.
     
  6. Chris C

    Chris C Well-Known Member

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    Ironically to ward off this property and economic recession Australia really needs looser credit standards to start growing the money supply and economy again. There is a reason why the RBA dropped rates 400 basis points in the last few months alone, it was to loosen credit and get it flowing into the market.

    If banks tighten credit standard now when there is already weak demand in the economy, this will of course help protect their skins but will almost certainty ensure that property prices and the economy fall. Unfortunately it would appear that the RBA can't loosen credit condition faster than commercial banks are tightening their own lending (I should point out that at least some of banks reducing lending is also due to individual reduction in desire to want to borrow during these turbulent times).

    I'm not saying banks should be out there throwing money at any mug that asks for a penny, I'm more suggesting that we are damned if we do and we are damned if we don't... so sub prime or no sub prime in Australia it's going to be a tough road ahead for property and we are definitely going to see some funky economic manipulation to try and jump start this economy.
     
  7. samaka

    samaka Well-Known Member

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    Isn't the situation that we need more, looser, easier credit for businesses? Tightening or loosening credit conditions for first home owners shouldn't have a huge effect on growing the economy.
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    The housing construction industry employs a lot of people - if there are not enough properties being built (because nobody can get finance to buy them), then there will be a negative impact on employment and related services and suppliers to that industry (and also lower tax revenue) - which will work to hold back the economy somewhat.

    That being said, for FHO's buying established dwellings, the impact would be somewhat less - mostly just the real estate agents, conveyancers / solicitors, auctioneers, brokers, and tax revenue is affected by a market with low turnover of real estate.
     
  9. samaka

    samaka Well-Known Member

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    That's the point I was driving at. FHOG may turn over a lot of cash for the people involved - but there's nothing NEW being added to the economy.
     
  10. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Isn't the regular turnover of cash fundamental to the smooth operation of the economy - without which we can't grow anyway ?

    The economy can't grow from us sitting on our cash - it can only grow from us working to earn it, then spending it (or investing it). The turnover of cash is the grease which keeps an economy operating.

    It might look like a closed system (just the movement of little coloured bits of flexible plastic around and back again) ... but without that movement, the economy wouldn't work at all and we couldn't grow no matter how hard we tried.

    At least that's my non-expert view on things.
     
  11. Chris C

    Chris C Well-Known Member

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    Very true. Businesses is really the sector that we want to be borrowing for the sake of investment, unfortunately it appears at this stage that getting finance for a business is exceedingly difficult and costing a great deal more than 18 months ago. In addition to this a lot of businesses are not wanting to make big investments at this stage given the cloudy future.

    Individuals borrowing to buy housing they don't need, doesn't help the economy a whole lot in the long run, if anything it hurts the economy in the long run. Sure it will save a few otherwise redundant jobs in the short run, but ultimately it just exascerbates the inefficiency and imbalances we are seeing in our property market.

    I still don't think it justifies the actions the government is taking to prop the industry up. There is far too much politics going on and not nearly enough good policy being formed, but that's just my two cents.
     
  12. bigbuddha

    bigbuddha Well-Known Member

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    Chris C,

    at this point in time, as a business owner myself, it is alot easier and alot cheaper to borrow as a small business than it was 18 months ago. It maybe just my industry but that has been my experience.

    Also in terms of making big investments, now is the perfect time to be swallowing up competitors, as long as they are fundamentally a sound business of course.

     
  13. samaka

    samaka Well-Known Member

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    Yes of course, however this discussion is about the existence of a grant (and reducing in stamp duty).

    Is a dollar that the government gives to a FHO to buy an existing property, worth while? Could that dollar be better spent to help the economy.

    In my opinion yes. Most people (as individuals, couples or a family unit) will always want their own property. Every young person who still lives with their parents more than likely wants to move out.

    The FHOG isn't creating new demand for property - it's just enabling some of that demand to be met by the purchasers at an earlier date. If the $7k, $14k or $21k makes or breaks your decision to purchase a property, then the absence of the FHOG just pushes back your purchase till you save some more cash.

    Suppose the only the argument is that the FHOG is good because it helps the secondary roles in the real estate industry. Mortgage brokers, real estate agents, solicitors, etc will all be kept in a job. However I don't care if there is a contraction here.

    Real estate isn't a dying industry nor is it a new and evolving one. A lost job in the real estate industry today will probably re-appear in a few years when the market picks up.

    If the intention is for keeping jobs. Then we should be identifying jobs which are dying out (manufacturing) and those that will be growing (high-tech R&D) and supporting those instead. Edit: I mean provide education, etc

    Real estate is an industry that should be reflective of the overall economy. So you should help the economy, not real estate specifically.
     
  14. Chris C

    Chris C Well-Known Member

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    I'd imagine that when it comes to obtaining business finance at this stage it largely depends on your business structure and what role financing plays in the operations of your business and what risks you are exposed to.

    I know my father largely operates his business without financing from banks, but as you mentioned, has recently looked to take over smaller struggling firms in his industry, but has been knocked back or had very restrictive limits placed his borrowing capacity. Where as in the past when his business was smaller and less profitable he was able to more easily obtain financing to buy out other business back then.

    I'm not suggesting that this is reflective of everyone, but from a lot of the reports I have been hearing obtaining finance when it comes to business has now become a very selective process whereby if the bank is comfortable with your business and its direction there is virtually unlimited credit available at cheap rates, yet if you are even marginally exposed to risk then the banks don't want to know you.

    Anyway I expect in 6 - 12 months getting finance will be even harder than today even with further reductions in rates.

    This is a big part of the problem, people buy too much stuff they "WANT" on credit rather than ony buying things they "NEED" with the money they already have.