I recently interviewed Financial Literacy advisor and News Ltd columnist Scott Pape about the Federal Government’s First Home Buyers Grant (FHBG)
My discussion with Scott centred around this question: “is the FHBG really a Sellers Grant setting up buyers for a fall, for the temporary benefit of propping up house prices and providing work for the construction industry/real estate agents”?
Interest rates are currently at 50 year lows and young people around Australia are scrambling to take advantage of the federal governments temporary boost to the FHBG.
After doing a basic comparison these people are thinking that the cost of mortgage payments is currently quite similar to their weekly rent so why not take advantage of the grant to act as a mortgage deposit
After the Rudd government was elected, the Housing Minister Tanya Plibersek told Scott “We won’t be increasing the grant, because we’ve seen that all it does is end up in the pocket of the seller” so their decision to boost the grant and extend it further is perplexing.
In fact members of the Rudd Government’s own advisory committee on housing affordability have criticised the extension of the first-home buyers grant, saying it has outlasted its economic benefits and the grant’s extension will mean first-home buyers will continue paying inflated prices for bottom-end properties at a time when the market should be moderating.
Scott says home ownership is a wonderful thing, being able to afford it comfortably is the issue because interest rates don’t stay at 50 year lows forever. This is merely a false boom like the sub-prime crisis in the USA which was driven by well-meaning but deluded politicians.
People should consider the following key factors before leaping into the housing market head first:
1. If you currently can’t even handle paying off credit card debt or a car loan do you think you can pay off a mortgage over several decades?
2. Loans for first home buyers have risen by $52,000 or 23% since February 2007 and the FHBG has fueled this market distortion by providing buyers with more cash to spend which has inevitably led to home sellers raising their prices by a similar amount
3. Getting a 100-105% mortgage is very dangerous because it sets you up with a large chance of mortgage payment failure from the very beginning.
4. The big Australian banks are showing signs of tightening lending criteria and requiring home buyers to chip in some of their own savings as a deposit as well as the FHBG.
If they continue tightening criteria further to protect themselves from issuing risky loans it could lead to a drop in demand for
houses on sale and therefore a drop in house prices
The most sensible thing you can do is to take advantage of a great government initiative called the First Home Savers Account to accrue a 15-20% deposit on a house so you avoid the cost of lenders mortgage insurance and are seen by a bank as a responsible person who is a low risk to lend money to.
Also if you and your partner want to buy a home do some analysis and see if you could afford to pay off a mortgage at 10% interest rates on 1 income
This may sound like an unlikely worst case scenario but the 2009 federal budget predicted 1 million Australians could be unemployed as the economic downturn continues.
Even without considering that prospect it’s reasonably likely that you’ll decide to have kids during the 25 years you’re paying off a mortgage in which case a 2 income family becomes 1 income supporting 3 or 4 people.
So be aware of all the facts, look before you leap into the housing market and above all buy a home whose price is within your means, Stop Keeping Up With The Joneses – They’re Broke!
Scott Pape is well regarded by the finance industry and media, regularly giving impartial financial tips on Australian Radio (Triple M, ABC Radio) & TV (“The Nest” on SBS) as well as in his newspaper column and Barefoot Investor blog.
He is also the author of best selling book The Barefoot Investor, which helps young people understand the complex financial products we all have to deal with in order to save money and build their investments.