15 Jan. 2009

Fiscal stimulus – Australian style

I note that the Sydney housing market is not behaving like it should giving the looming tide of economic depression – that in fact it remains buoyant, at least as reported by the Herald, a paper which is known for spruiking real estate, however.

Still, there are important things to note here. One is the giant injection of federal money into housing in the form of the increased first homebuyer's grant. I'm tempted to see this as a bailout of the speculative buyers and builders who are currently holding the properties that the first homebuyers will buy, and who are otherwise sitting on unsaleable houses. It is of course obviously also a subsidy to people to buy houses, but this in fact depends on the real value of houses, which is fairly difficult to determine. It's quite possible that in the longer term even with the grant, especially in more expensive properties where the grant is a relatively small proportion of the purchase price, that the homeowners will be left out of pocket in time.

The fundamental driver of any housing market is population growth. In recent times we've seen a massive additional impetus to it in the form of the wealth effect caused by cheap credit, the additional employment seen in the wealth-effect economy, and the high salaries in certain sectors that accompanied it, and then a further major impetus in the form of speculation. The wealth effect one can expect to now disappear – this includes the drying up of cheap credit, rising unemployment and lower household incomes. Speculation worked on a perception that property prices would just keep rising, and in current circumstances has itself largely dried up. This all spells a crash in housing prices. I doubt population growth will hold up either – the collapse of the economy will likely reduce immigration, a major component of Sydney's population growth, and may even result in increased emigration.

The real wild card here is what the government will do. The Australian government is still enamoured of the wealth-effect economy like so other governments, and is trying to jump-start it again, an attempt that may have short-term success, but cannot have long-term success. The value of those grants are being built into the national debt and will have to be paid off by the battlers they are apparently helping, so this 'free money' is rather illusory.