Tuesday, June 14, 2011

QLD Gov attempts to re-leverage property buyers

In a budget announcement earlier today the Queensland Government announced a housing stimulus package to help prop up their ailing property market:
Bligh’s $140 million Building Boost to stimulate housing sector
Premier Anna Bligh and Treasurer Andrew Fraser have announced major reforms to the state’s housing sector to boost construction jobs and make new housing more affordable.
The Queensland Building Boost is a six month, $140 million initiative that will provide a $10,000 grant for all Queenslanders constructing or purchasing a new home up to the value of $600,000, with first home buyers also eligible for the $7,000 first home buyer’s grant. Queensland Government
To offset the cost of the new 'boost' they are reducing the long standing transfer duty concession for home buyers.

Further to this at the bottom of the announcement was a link to the following chart:

What does this chart say to you? To me it reads "Look at us, we are going to have the most over leveraged First Home Buyers in Australia, YIPPEE!".
From what I can gather First Home Buyers will still pay no stamp duty for purchases under $500,000. So consider a situation where a young couple are looking to buy their first home, they both have average incomes but little ability to save (so only have a small deposit). The $10,000 boost has the potential to lift their purchasing power by up to $200,000 at a 95% lend... don't believe me?

Use an example where the couple are each earning $45k pa net ($90k pa net combined). They have no other financial commitments (e.g. credit card/personal loan). I set the interest rate to 7% and the loan term to 25 years. The calculator suggests they could borrow up to $642,000. Of course they will be limited by their deposit, so if they have $8,000 saved on their own, with the original $7,000 First Home Owners Grant they would have a $15,000 deposit, with a 95% lend (capitalised LMI) they currently have purchasing power of up to $300,000 (deposit x 20).

With the additional $10,000 from the Queensland Government they now have a $25,000 deposit ($8,000 savings, $7,000 FHOG, $10,000 Building Boost) or with a 95% lend (capitalised LMI) they have purchasing power up to $500,000 (deposit x 20). 

$200,000 more than before the extra boost, got to love leverage!

Basically as long as they don't hit their serviceability limit any increase in their deposit (including free handouts from the government) has the potential to be boosted by 20x using the amazing power of leverage!

What's more is that even the non First Home Buyers will be assisted by the power of leverage. For example in a situation where a buyer had to pay $5000 more in stamp duty (due to the removal of concession) but gets the $10,000 Boost they are still able to increase their purchasing power by $195,000 ($200,000 - extra $5,000 stamp duty), still assuming they are not running into a serviceability limit based on their income.

Now the above examples are just that, examples. They don't necessarily reflect real life scenarios and in a real life scenario it's possible that a buyer hits their serviceability limit before they hit the maximum purchasing power (based on deposit), but the ability to leverage this free money can't be ignored.

The Queensland government is obviously getting desperate. Their housing and economic situation is already dire (being well covered by Delusional Economics over at MacroBusiness.com.au) and they are hoping this will kick start their housing market like the Federal Government did with the First Home Buyers Boost in 2008/2009... will they be successful? It will be interesting to see.


1 comment:

  1. They will continue to kick the can down the road and keep the party going as long as possible. As long as they can still pass the cost to the tax payer - which has no recourse for complaint or resistance - then they can tap this market essentially as an unregulated and unrestricted ATM for their own purposes.

    With 2/3 of the country either owning outright or paying off, this remains a politically viable solution, especially in light of the fact that by and large the sheeple are too ignorant to see the long term rammifications of such policy.