Premier Daniel Andrews is launching a program to help first home buyers get on the property ladder in Victoria, the fourth most expensive property market in the world. The scheme, starting on July 1, is expected to benefit first home buyers save $15,535 stamp duty on a $600,000 property. Tax discounts for homes valued between $600,000 and $750,000 will be applied on a sliding scale.
There is only one reason why I think this is a flawed program. Encouraging people to climb onto an already inflated property ladder may end up costing them way more than $15,535 in lost equity. If Premier Andrews had a better command of economics, he’d know that in Melbourne prices are around 10x income which is higher than just before the GFC at 6.5x. In Sydney housing prices are 12x income. In 2007 they were 7x income. This is simply unsustainable.
As I wrote yesterday, the extent of people who are in mortgage stress (30% or more of salary on mortgage) or ‘severe stress’ (missed a mortgage payment) is shockingly bad. Victoria has 25% of its mortgage borrowers in this position. Given first home buyers are likely to be at the lower end of the income generation spectrum, one would imagine encouraging them to buy in toward the top of a bubble seems misguided. By Digital Finance Analytics own study, if rates increased 3%, Victoria would rank 3rd worst state for stress/severe stress at 42.5%, 16% 0f which would be severe. We already have examples of property markets going wrong in Australia.
Take the mining town of Gladstone. In the last three years housing prices have plummeted 52%. Over 10% of the property is up for sale not to reap a nice return but cut losses. It is a completely different dynamic. Average rental prices per week have dropped from $320/week to $150/week as mining activity leaves high vacancy rates. Real estate agents there have been talking up the market saying panic wouldn’t ensue if landlords weren’t flicking the chicken switch. Talk about defending a lost cause.
Or should we just thank Daniel Andrews for picking the top of the property market in Victoria? Perhaps letting natural market forces come to play will mean first home buyers who save up, be patient and wait to enter at more affordable prices after a sizable correction may will be only too happy to pay stamp duty on a substantially discounted house.