Victorian Premier Daniel Andrews is now turning the government into a property tycoon using taxpayer dollars to pour gasoline on the 6th most expensive property market in the world. His latest plan to push the greater fool theory in a country that has a 180% private debt to GDP is to encourage those who can least afford to climb on the property ladder to spend even more. While a 25% interest free loan looks exceptionally generous, rational thought for a first time buyer is to spend closer to 125% of what they would originally looked to fork out. While the government gets its 25% back simple economics tells us this is a bubble waiting to pop. To think people will stick to financing 75% of the median house price is bonkers.
If the mortgage borrower defaults, will the government accept NAB, CBA, ANZ or Westpac et al wish to do a fire sale because their balance sheet may not sustain unrealized losses in their balance sheet? Sure it is only 400 people to start with (unfair in itself because 401 onwards will face a steeper wall) but this stinks of the antics pre GFC. People then were lured into borrowing more because appraisals were massaged higher and without knowing it buyers were actually $100,000s in the hole before they started.
So let’s assume that Andrews lends $162,500 to the first 400 on average (median home price $650k). $65mn. Victoria’s tax receipts are around $20bn. Not a huge dent but you’d only need 12,300 people on a scheme to speak for 10% of the budget. There are 25,000 people wanting to climb the property ladder. If all stepped up for that, Victoria’s taxpayers would be stung for $4bn or 20% of the budget. Property-based taxes including stamp duty, land tax, the congestion levy and the Growth Areas Infrastructure Contribution are projected to contribute more than 42% of Victoria’s tax revenue base in 2016-17. That could drop like a stone.
Andrews would be better off addressing supply issues. Aussie property prices are a function of restricted supply. By subsidizing the first home buyer he inadvertently supports investment property owners by inflating the value of their properties even further exacerbating the problem he’s trying to fix.
Andrews is also copying the South Australian playbook on renewables which could have a reverse effect on the economy. Note South Australia was the only state which recorded negative tax revenue growth no thanks to making it a less attractive place to invest . It has the highest unemployment rate, the highest energy costs, slowest growth and is now forced to spend 13% of its revenues on a hairbrained emergency energy plan.
In any event if the private sector is unwilling to lend to these people it is a signal they’re concerned about levering already overstretched balance sheets. NAB just raised variable rates not because the RBA ticked cash rates higher, they’re facing higher funding costs via the wholesale markets where they source 40% of the cash they lend. Don’t kid yourself that already overinflated asset bubbles aren’t being recognized. Australia’s increasingly destabilized political scene and pending sovereign credit rating cut aren’t lost on investors. Take a look at US bond markets readjust in the last 4-5 months.
While as well intentioned as this plan of Premier Andrews may indeed be, shoveling the desperate into a property market using taxpayer funds will likely end up hurting them over the long term. Listen to the market. The invisible hand is about to grab many by the throat.