(03) 9020 2905Debt Man column – The West Australian (Money)
For: October 5, 2009
Bruce Brammall
Debt Man
During exciting moments in football, the mathematical probability is that roughly 49 per cent of the audience will roar and 49 per cent will groan.
The other 2 per cent missed it because they were in the bar or the toilet. That would be me.
Sport is a bit “yin and yang”, where the good and the bad balance each other out. Alternatively, it’s Isaac Newton, where every action has an equal and opposite reaction.
And so it goes with the property game in Australia at the moment.
Last Wednesday (September 30) probably passed without much consideration. But around Australia, it should have been roughly half cheer, half jeer.
In the middle of last week, half the Federal Government’s First Home Owner’s Boost (FHOB) vanished. If you signed a contract to buy a new home last Wednesday, K-Rudd would have given you $21,000. If you couldn’t sign until Thursday, you got only $14,000. Established home “boosts” fell from $14,000 to $10,500.
On January 1, both handouts will fall to $7000.
If you’ve read the general media, this sounds like a bad news story with no winners. But just like football, there are two teams playing here, and there are winners and losers.
The two sides are “home buyers” and “investors”. They’re not sworn enemies –both would cheer cuts to stamp duty – but you’d better believe they have different interests when it comes to FHOB.
Imagine an auction where two couples are very keen on the one property.
One couple is buying their first home. They’ve got a deposit, significantly boosted by $21,000 from the government. They are emotionally attached to the property, because they want to live there.
The second couple are investors. They are probably wealthier and could probably afford to pay more. But this purchase is about making money. And overpaying for property is a cardinal sin when it comes to investing.
Who’s more likely to “win”? Currently, the first home buying couple. And not a tear would be shed for the investing couple. The auction crowd would be heavily barracking for the newlyweds.
In Perth, and roughly mirrored Australia-wide, the first-home market has been strong. Perth’s median house price rose strongly through the March and June quarters and most likely in the September quarter also.
The government’s reasons for introducing the boost were genuine. In Australia, from late 2007 to late 2008, property prices had softened. The boost was designed to stop a property crash like the ones occurring elsewhere globally.
In that regard, the boost has been successful. It was helped along by low interest rates, fiscal handouts and unemployment remaining low.
Demand clearly increased, which leads to higher prices being paid. Suggestions that the $14,000 or $21,000 grants have added as much as double that ($30,000 to $40,000) to prices are likely, which would be a false economy for those getting the grants.
Where to now for property prices? Anecdotal evidence suggests people have bought forward their buying intentions, often by 3-6 months, in order to get the higher grants on offer.
If that is the case, there will be a vacuum in the first home buyers market early next year. It’s likely that during the period from January to April (even May) 2010, there will be fewer first home buyers than normal in the market. I wouldn’t want to be a seller early next year.
Now, flip the coin. Newton’s third law of motion – equal and opposite reactions – means that someone is benefiting from higher sales prices.
The people who are selling traditional first home buyer’s homes are … drumroll, please … second home buyers who are moving on up and investors who are cashing up. They’ve been getting prices that would, probably, otherwise be unattainable. (And then there’s developers and their shareholders.)
What should you take from this current sequence of events?
- Don’t be scared of missing out on the “boost” if you’re a first home buyer. There will probably be better buying, without the boost, next year.
- Investors trying to buy in at the moment shouldn’t panic for the same reasons.
- If you’re selling and you get a good price for your property, send Uncle Kevin a Xmas card. You were the real recipient of the First Home Owner’s Boost.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser. bruce@debtman.com.au