Ideas@TheCentre
Housing finance hardly an effective indicator of fiscal policy success
The recent surge in housing finance commitments has been cited as evidence for the effectiveness of the government’s fiscal stimulus measures, in particular, the increase in the grant to first home buyers from 14 October last year. While it is possible to point to sector-specific effects, it is the economy-wide implications that matter in assessing the effectiveness of fiscal policy in stimulating demand.
The first home buyers grant was increased from $7,000 to $14,000 for purchases of established dwellings and to $21,000 for new dwellings. However, the increased grant is only available for contracts entered into by 30 June this year (mark your calendars!) The government expects this initiative to set the budget back $1.5 billion.
Recent data on housing finance suggest that the grant is having the desired effect of bringing forward demand on the part of first home buyers. The number of first home buyers as a percentage of total owner-occupied housing finance commitments increased from 25.7 percent in December to 26.5 percent in January, the highest proportion since this information was first collected in 1991.
However, the increase in the grant is not the only factor at work. Housing finance commitments are very sensitive to changes in interest rates. The four percentage point reduction in the official interest rate since September last year has taken standard variables mortgage interest rates to their lowest since 1970. The gains in housing finance commitments have not been limited to first time home buyers.
The one-time grant may bring forward demand from first home buyers, but only at the expense of future activity. Commitments from first home buyers will likely weaken substantially after 30 June when the one-time incentive is no longer available.
First home buyers are now competing with each other to bid-up the price of houses. While the grant may induce some additional housing supply, much of the benefit is likely to be captured by existing property owners and developers at the expense of first-time buyers. The grant also diverts resources into housing activity at the expense of other sectors of the economy. The fact of the matter is that economy-wide implications are more important in assessing the effectiveness of fiscal policy in stimulating demand rather than the effects on specific sectors.
Dr Stephen Kirchner is a Research Fellow at CIS. His paper Bubble Poppers: Monetary Policy and the Myth of ‘Bubbles’ in Asset Prices was released by CIS yesterday.
