With the Australian Government handing down the budget tonight (Tuesday) it would be remiss of me not to discuss just how this is going to affect real estate, property and the greater economy.
There has been a lot of speculation that the First Home Owner’s Grant (FHOG) is going to be axed and I certainly hope it is. As I have said in previous articles, the FHOG has artificially increased the prices of properties under $500,000. These prices are substantially higher than true market value and the problems this will create for thousands of new home owners are massive.
The removal of the FHOG will help bring reality to the under $500,000 market. For many this may mean the loss of their home as banks call on home owners to increase their equity in properties. For those that have borrowed, 90, 95 or 100% this will be all but impossible.
The removal of the FHOG will bring much needed relief to home owners with properties that have true value of $500,000 – $650,000. These properties have struggled enormously as a result of the $500,000 limit for maximum Government Assistance and have been selling well below their true value.
I have been repeating that the level of household debt in Australia week after week is simply staggering and bordering on incomprehensible. Over the last decade household debt has risen from around $700 billion AUD to more than $3.5 trillion AUD. In other words household debt has increased by more than a factor of 5. Wages have not increased in line as the Reserve Bank has continued with its obsession to keep inflation below 3%.
The growth in property prices, especially in the early part of the decade was fueled by the availability of credit as the Banks handed money out at ever increasing rates, thus fueling the “once in a lifetime” property boom. Debt spiraled out of control as home owners borrowed against their new found equity in their homes to purchase more overpriced properties to negative gear, renovate, holiday or purchase a new luxury car.
This fantasy is now crumbling and with it comes the realization that the money has to be paid back – for the country to truly prosper we need to debt to deflate. Our lifestyles need to vastly change and we need to de-leverage which will take time. For some it will mean bankruptcy and for others it will mean opportunity.
One thing is for sure today: when the Treasurer brings down the budget tonight there will be few winners. How can there be when we are in such a mess? Our major trading partners China and Japan are suffering and our reliance on resources is enormous: resource prices are way down, unemployment is trending upward, consumer spending is shaky, immigration levels have been reduced and the pressure on the public purse is at an all time high.
The true cause of this mess is the massive increase in household debt over the last 10 years by a factor of five times. I have repeatedly heard members of the Opposition gloating that they ran surpluses and paid off a $96 billion Public Debt. They seem to forget to also tell the public that they allowed household debt to increase from $700 billion AUD to more than $3.5 trillion AUD over the same period.
The former Howard Government has blood on its hands for its inaction in dealing with the spiraling levels of household debt during their watch. We now have to watch with interest to see what solution to the problem the Rudd Government can find.
I wonder how many of the die-hard Liberal/National supporters are aware of the massive increase in household debt during the term of the Howard Government? Further to that I would be interested in the Spin Doctors’ answers as to why it was allowed to happen? It’s easy to blame Labor for the deficit to come, but to truly understand the reason as to how debt was allowed to explode takes much more thought.
Marquette Turner Luxury Homes