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Simon Turner’s “The Real State”: Aiding The Bubble Will Just Aid The Burst

by Marquette Turner

in Money & Business, Real Estate Radar

Keeping up with the ever-changing commentary and realities of the Australian and worldwide economy (which don’t necessarily work in-congruence) can be pretty daunting. Whilst no economist myself, I nonetheless happily offer my opinion on “the real state” of play as I see them.

There have been a number of moves taken by Kevin Rudd of late to primarily ensure that confidence in the Australian banking system is not tested, and to prevent any panic (short or long-term) which could cause irrevocable damage.

His recent package of $A10.4 billion recognises when an economy is tinkering on the edge of a debt-induced recession, government spending both boosts demand, stimulates consumer confidence and thus spending; and provides the private sector with cash flow needed to meet its debt repayment commitments.

As such, I believe the following aspects of the package are positive:

  • Assisting pensioners and families;
  • Guaranteeing deposits at Australian banking institutions

On the other hand, I fail to see how increasing the First Home Buyers Grant and increasing the number of grants will have any long-term positive help to the real estate market. It really is like Nero fiddling whilst Rome burned.

Quite simply, the root cause of this crisis is excessive debt that drove house and share prices to unsustainable levels. Times appeared on a never-ending high as the housing bubble continued, but this was only fuelled by the money was adding to demand.

An increase in $7000 is marginal at best:

  • given that it only represents a small percentage of current house prices:
  • given that most first home buyers are likely to be located in areas where prices have already begun to soften significantly;
  • if increasing unemployment will leads to lower demand;
  • if perceptions of increased demand lead to increased supply

Debt servicing became prohibitive as house prices rapidly outstripped incomes and this lead to an increase in the size of the bubble. And whilst a drop in interest rates has taken some of the pressure off mortgage holders, consumer prices remain prohibitive, particularly when the flow of money and confidence throughout the market is not looking good.

Increasing the amount of money that first home buyers can play-with on a home may help those who can’t afford to get into the market do so is not very productive, particularly if it is factored in by all parties involved, which simply negates its use.

This at a time when the dollar’s fall has put at risk predictions of falling inflation from the current unacceptable 5%, and Australia’s international debt is climbing.

What is needed is not a boost to the First Home Buyer’s Grant, but a 1% cut in interest rates by the Reserve Bank on Melbourne Cup day, while Government’s of all levels must stimulate business with tax cuts otherwise business will be forced to stop hiring new workers and lay-offs of existing workers will increase substantially. The bubble must be deflated, not stretched to the point of no return. Simon Turner

More information: Interest Rate articles & Henry Thornton (our favourite Economic Advisor)

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