Home deposit rules could stem price bubble

Amid fears another house price bubble is brewing in Australia, RBA Assistant Governor Guy Debelle has entered into debate with the suggestion of regulating the size of deposits home buyers must provide banks, in a bid to prevent credit fuelled asset bubbles.

Back in September the International Monetary Fund endorsed preventive action by central banks to pop asset bubbles with rate rises. Using Interest Rates to pop bubbles is seen as a blunt instrument, as not only does it control asset bubbles, but it will also restrict credit used by businesses to fund purchases of more productive assets, used to generate real wealth.

When Dr Debelle was asked what could be done to address bubbles, such as our current housing bubble, aside from raising interest rates, his response was the tightening of loan to value ratios. He gave the example of Hong Kong where some flats have risen in price by more than 40% this year. Last month, a very concerned Singapore and Hong Kong started reducing the maximum LVRs.

Australian Banks have already started to reduce LVRs, but the maximum LVR is not mandated in Australia.

But while Banks can do their bit, the government must take some ownership of the current housing asset bubble they have just created. Buyers went on a frenzy after the government poured petrol on the first home buyer grants. Rather than giving free money away, governments should be encouraging responsible savings and home purchases.

In February 2008, the Government introduced the First Home Savers Accounts. The accounts provide a means for first home buyers to save to purchase a house by giving a 17 percent co-contribution up to $850 a year for every dollar saved, while taxing any interest at a generous 15%.

The accounts however has been a flop with buyers, partly due to many restrictions placed on the money such as a minimum contributions of $1,000 needs to be made over the course of at least four separate financial years before any withdrawals are possible.

This in parallel with First Home Owners Boost this year giving an instant and additional $7,000 grant on top of the existing $7,000 first home owners grant for existing homes and an extra $14,000 for new homes made the first home saver accounts too restrictive and a lot of hard work. Why save $20,000 of your own money and wait four years to get a $3400 contribution from the government, when you could buy during the FHOB period and get instant gratification of $14,000 from the government?

The good news is the boost is being wound up, and should be a distant memory come the 1st January next year. However the government seems insistent in keeping the original first home owners grant of $7,000. This grant was first introduced in 2000 after the introduction of the simplified tax system or GST in Australia. The purpose of the grant was to offset the effect of GST on home ownership.

Ten years later, surely we don’t still need to offset the effects of the GST? Perhaps the grant should be phased out, and the First Home Saver Accounts be fine tuned. The requirement for four years savings, could be reduced to two years, and the co-contribution be increased to 35% and capped at $7,000, so that after four years of demonstrated saving, first home buyers can walk away with a $7,000 co-contribution from the Government.

This coupled with mandated, lower maximum LVRs effecting the entire mortgage market and not just first home buyers could go a long way to a more sustainable housing market.

» Home deposit rules could stem price bubble – The Sydney Morning Herald, 20th November 2009.