First home owners grant – don’t dream it’s over

When Kevin Rudd announced an increase to the First Home Owners Grant (FHOG) a few of us voiced concerns about how this would essentially maintain an artificial price bubble in the property market.

Under the government’s $1.5 billion first home buyers boost, the first home buyers grant was doubled from $7,000 to $14,000 last October. Those first home buyers who purchase a new home receive an extra $7,000 to take the total cost of government assistance to $21,000.

There is some evidence to suggest that the low to mid range of the property market has held its ground, however the top end of the market has been hit hard, with many properties in once “exclusive” suburbs for sale on the market at prices considerably lower than one or two years ago.

In reports just published, Prime Minister Kevin Rudd has confirmed the first home buyers grant will not be extended past its deadline of June 30.

“We’ve indicated that that will conclude in a very fixed and finite timeframe,” Mr Rudd said in a Perth speech reported by Sky News.

“It’s had a real effect. We’re still measuring its full effect, but I think it’s very important that as a community we understand that deadlines are imposed for a particular purpose.

“All good things must come to an end.”

“It’s had an effect?” In other words he doesn’t know…

Unsurprisingly, the construction and real estate industries have called on the grant to be continued.

They have voiced fears that if the grant is removed the real estate market will collapse.

But one expert says that it is actually record low interest rates and a softer housing market, not the grant, that is spurring on many first home buyers.

Figures showing that by the end of last month more than 42,000 people had taken up the grant.

NSW has seen the highest uptake, with 14,404 first home owners receiving the boost, followed by Queensland and Victoria (9,319 and 8,632 respectively).

About 4,200 first home buyers have entered the market in Western Australia since October, more than 3,300 from South Australia and 1,135 from Tasmania.

Both territories recorded the lowest uptakes with 703 grants awarded in the nation’s capital and 404 in the Northern Territory.

Others have warned that the grant is leading to ‘home loan time bomb’ with first-time borrowers taking out larger loans than they can afford.

The average loan growing by 22 per cent from $230,000 in March last year to about $281,000 this March

While no one can accurately predict what will happen after the FHOG passes its closure date, I think it’s hard to imagine that there will suddenly be a collapse in property prices. With interest rates at record lows, property prices approaching more realistic price levels (particularly if “stressed” sellers are forced to sell) then property will still remain an attractive option for first home buyers.

One valid criticism of the FHOG is that there is little evidence to suggest that it made a marked impact on the construction of new homes, with many first home buyers using the grant to purchase existing dwellings.

While the FHOG may be coming to an end, I suspect we will see new measures announce specificially designed to encourage the construction of new buildings.

But of course, it’s anyone’s guess really…