Posts Tagged ‘FHOG’

Interesting chart: Number of home loans vs Size of home loans

Thursday, March 11th, 2010

Today, we will show you a few interesting charts.

The first chart is this:

Number of loans vs Size of loans (Total)

Number of loans vs Size of loans (Total)

It shows the total number of home loans and the size of loans. As you can see, from September 2009, the number of loans crashed, but the size of loans still remained in a steady up-trend.

Now, let us break it up the numbers into First-Home-Buyer (FHB) and non-FHB:

Number of loans vs Size of loans (FHB)

Number of loans vs Size of loans (FHB)

As you can see, since the doubling of the First-Home-Owner-Grant (FHOG), the number of FHB home loans surged to a record high. But still, the size of loans still remained in a steady up-trend

Number of loan vs Size of loan (Non-FHB)

Number of loan vs Size of loan (Non-FHB)

For the non-FHB, it is clear that the total number of loans remained in a down-trend despite the surge in 2009.

There is a common characteristic among these 3 charts: despite the number of loans declining, the size of loans keeps on growing.

What do you think this means?

What should the ‘evil’ savers do?

Sunday, June 14th, 2009

In our previous article, What goes in the mind of the Rudd government as it extends FHOG?, Rebecca asked the following question:

I was wondering, can you guys make any suggestions on what potential first home owners OUGHT to be doing INSTEAD OF leaping upon the FHOG [free cash (of around $14k to $21k) that Australian government gives to first home buyers]? This reader may, uh, be personally invested in the answer to such a question 😉 but I bet a lot of others are in the same boat: people who’ve been saving saving saving only to have the cheese moved $21,000 ahead again (thanks KRudd!), and now face the possibility of having their hard-saved future deposit decimated by inflation because it’s still liquid rather than sunk into bricks and mortar?

Assuming stable employment (easier said than done, but run with me here), isn’t the property market almost a safe bet now just because Kevvie’s obviously bailout-happy and presumably knows he’s not going to be very popular if he lets all the first home owners he made go under, so is likely to keep on bailing?  Does the traditional advice that a person save a good deposit apply any more when the only way to save your money is to have it invested in property or some other format that’s not going to get devalued should inflation occur? What else can one do to escape being a victim in this whole mess simply through being on the poor end of the spectrum and trying to do the right thing and be responsible?

Basically, as Rebecca asked, let’s say these 3 conditions are satisfied:

  1. Assuming you have a guaranteed stable job (if we read Rebecca correctly, other people are not in this envious situation).
  2. The government will succeed in enticing people to go deeper and deeper into debt to bid up property prices higher and higher.
  3. If those who are enticed into debt default, the government will bail them out.

Wouldn’t this result in property price rising further and immune to a price crash? If that’s the case, should savers gouge themselves in debt instead because the government is committed to moral hazard?

[Note: some parts of what follows are a bit of sarcasm and humour- so, don’t take them too literally.]

Sure, it can be very cheap and easy for the government to engineer further property price inflation. The FHOG is an example of that. The government needed to fork out a relatively small outlay to result in a much larger increase in borrowing, which helps to inflate property prices even more. To see why, imagine a borrower has a $1000 deposit. At 90% LVR, he can buy a house that cost $10,000. Let’s say the government give the borrower another $1000. At the same LVR, this borrower can now pay $20,000. Thanks to the powers of leverage, a $1000 outlay from the government result in an increase of $9000 in debt.

Sure, in the event that the sh*t hit the fan for the Australian economy, the government can bail out defaulting sub-prime borrowers willy nilly and prevent a property price crash. They can print copious amount of money (until Australia runs out of paper), invoke emergency powers to prevent repossessions, confiscate the wealth of savers to bail out irresponsible defaulters, nationalise banks, and so on.

The problem is, if the sh*t hit the fan for the Australian economy AND the Australian government engage in such extreme moral hazard, Australia will become a big banana republic and the Australian dollar will have less value than toilet paper. Foreigners lend a lot of money to Australia and they will readily punish any extreme moral hazards. In that case, all Australians will lose big time, especially savers. And also, a property is not recommended in such an environment because:

  1. One cannot carve out a tiny fraction of his property in exchange for food.
  2. There are much better hedge against hyperinflation than property- gold and silver. The reason is because credit will be scarce in a hyperinflationary environment because lending money is a losers’ business. If credit is scarce, what do you think will happen to property prices in real terms?
  3. As lenders raise interest rates to match the rate of hyperinflation AND one loses his job, one is essentially stuffed (unless the government bails him out).

So, if you believe Australia is going towards that route (it may not be as extreme as the scenario that we painted, but you get the idea) and you want to protect your savings, you may want to diversify part of your savings away from Australian dollars (as well as any assets denominated in Australian dollars). Ideally, such diversification should transfer your wealth to foreign countries, where the foreign government is in a position to respond with a “stuff you” to any Australian government’s demands for information about your foreign assets. For example, you may want to consider foreign currencies (preferably in foreign banks out of reach of the Australian government), physical gold and silver (stored overseas or buried in some secret treasure island guarded by dragons), foreign assets and so on. Lastly, if the masses and government persecute the evil savers the same way the Nazis persecute the Jews, be prepared to migrate.

Please note that we are not trying to be unpatriotic here. Our point is that, if politicians resort to extreme stupidity, they can easily turn a nation into a banana republic in record time. Just ask how Robert Mugabe did it by turning the bread basket of Africa into a starving and improvished nation.

What goes in the mind of the Rudd government as it extends FHOG?

Tuesday, June 2nd, 2009

As we all know, the Rudd government recently extended the increased First-Home-Owner-Grant (FHOG). The FHOG grant in itself is so controversial that even government advisers are questioning the wisdom of that scheme (see Rudd advisers criticise home buyers grant). Government propaganda hailed the FHOG as a means to help young Australians achieve the Great Australian Dream of home ‘ownership.’

Sadly, a lot of young people fell for that propaganda. One of the first tools of propaganda is to subtly twist the meanings of words.

For example, when a person borrows money to ‘buy’ a home, he/she do not really own that home in the first place. Instead, what happened was that the home ‘buyer’ had basically entered into a financial lease contract with the bank. The home ‘owner’ may have more freedom than a renter, but he/she has more responsibility in return. A large part of that responsibility includes financial accountability and trust to repay debts. There are many anecdotal reports that many first home ‘owners’ are not acting very responsibly.

There are also many applause that housing has never been more ‘affordable’ than before, due to record low interest rates. But the vested interests who gave the applause forget why interest rates are so low in the first place. The whole point of the RBA slashing interest rates is to reduce the debt servicing burdens of Australians (in the face of forecasted rising unemployment), not to encourage them to gouge on more debt. The FHOG, by its very nature, defeats this purpose by encouraging young Australians to go further into debt. Most worryingly, when interest rates are at record low, most of these first home owners are not hedging their gamble by fixing their mortgage rates. When the time comes for raising interest rates, many of these ‘affordable’ homes will become unaffordable.

Obviously, the Rudd government’s FHOG policy is a bad policy that will do more harm to Australia in the longer term. We are sure the government knows this. Yet, why did they go ahead with that foolhardy scheme, knowing that it is foolish in the first place?

Well, our theory (or rather, speculative guess) is that the real reason is not as stated in the propaganda (i.e. ‘helping’ young people achieve that ‘dream’). Instead, the true reason is to prop up (and if possible, blow a bigger price bubble) property prices for as long as possible, until China comes to rescue us. Why should property prices be artificially propped up? Let’s take a look at this chart:

Housing share of total private debt

As you can see, for the past 20 years, housing loans take up a larger and larger portion of the total private debt in Australia. At its peak in January 2005, housing accounts for 55.6% of debt. As in March 2009, it is slightly down to 53.1%.

At the same time, every mainstream economist are forecasting significant rise of unemployment rate. And as we said before in RBA committing logical errors regarding Australian household finance,

Given Australia?s high household debt (see Aussie household debt not as bad as it seems?), prime debt can easily turn sub-prime when unemployment rises. As unemployment rises (which all mainstream economists in the government and private sector are forecasting), it will eventually reach a critical mass of prime debts turning sub-prime. Once this critical mass is reached, the deterioration in the Australian economy will accelerate (see what?s happening in the US and UK today).

Rising unemployment will result in rising number of housing loans going bad. With housing loans taking up more than half of all debts in Australia, the sheer number of bad debts will threaten the stability of Australia’s banking system (bear in mind the amount of leverage in Australia’s banking system. See Small loan losses can wipe out banks). Unless…

What if the government succeeds in propping up the ‘value’ of the collaterals (homes) under-pinning the bad debts? In that case, the banks can take over the homes (and not liquidate in a distressed market), replace the bad debts in asset column of their balance sheets with homes with values that were artificially propped up (with the FHOG). We can imagine the Rudd government introducing some kind of scheme in which the banks rent the home back to the former home owner.

In addition, the government can implement another scheme to let the bank’s unemployed debtors to go on a repayment holiday (while interest payments get capitalised). That way, there wouldn’t be forced mortgagee sales to deflate house prices and coupled with FHOG to prop up the ‘value’ of homes, the accounting losses in the banks can perhaps be minimised?

Once the banking system goes down, the government will have to fork out up to AU$1 trillion in money (see Australian government?s contingent liability to exceed AU$1 trillion), which most likely mean Australia will have to print copious amount of money. Should that happen, the Australian dollar will be trashed and the government bonds will become junk bonds.

The question is, will this gamble succeed?