Stupid, stupid vendor

Sydney newspapers are reporting that vendors are increasing the prices of their properties in anticipation of an increase in vlaue caused by the recent changes to the First Home Owners Grant Scheme (FHOG). The grant was recently increased from $7,000.00 to $14,000.00 for existing properties, and a whopping $21,000.00 for newly constructed homes. The Sydney Telegraph calls these sellers “Greedy” but I would be more inclined to call them Stupid.

In case you haven’t noticed, the property market is really depressed. Forget all the kybosh that the various real estate bodies are pedaling, nobody’s buying. In other words – it’s a buyer’s market. So it’s a bit of a surprise that some vendors would think to put their prices up. They haven’t been able to sell their properties at their current asking price so they think the best idea is to increase the price? Right - good idea. Not.

I wrote this off as a one off but last week I was helping a client to restructure their loan to assist them with an investment purchase. They had their eye on a renovator near the beach on the Sunshine Coast which had been on the market for a while. After we had finance in order our clients went back to the vendor to make a cash offer (subject to valuation and building inspection) but guess what? The asking price was now $30,000.00 more than it was a week ago. What had happened?

During the process of arranging the pre-approval, the FHOG went up. So somehow, in a severely depressed market where house prices are clearly falling, the seller thinks this house is now 12% more valuable. Our client, and their cash offer, walked away. Stupid, stupid vendor.

Merry Christmas Mr Rudd

The Federal Government has announced a $10 billion financial stimulus to help prevent the Australian economy from sliding into recession in the next six to 12 months. The package is aimed mainly at low and middle income earners, and includes five main planks:

1. $4.8 billion in new support for pensioners and carers, to be paid in the form of lump sums later this year.
2. $3.9 billion for low and middle income earners. Eligible families will receive a payment of $1000 per child.
3. $1.5 billion for first home buyers, with the first home buyer bonus to be doubled from $7000 to $14,000 on established homes and tripled to $21,000 for new homes.
4. $187 million to double the number of training places available to 113,000.
5. Fast-tracking of the Government’s $20 billion infrastructure program.

The package is designed to stimulate economic growth by boosting consumer spending, so retailers stand to benefit most of all, as pensioners, carers and families will all have around $1000 more in their wallets. Most payments will be made around 8 December so this should mean the Christmas trading period will be a lot better than previously thought.

The Government’s support for the property sector has also attracted approval. The Housing Industry Association is predicting a big jump in construction activity and an improvement in housing affordability. When the first home owner’s grant was doubled for new house purchases in 2001, the number of new dwellings built increased by 3000 per month over a nine month period. This time around, HIA is tipping new housings starts will jump by 15,000.

Time is of the essence for those wanting to take advantage of this initiative as the changes to the grants are only available unitl June 30, 2009. Because of this "urgency", a wide range of property services and construction businesses should feel immediate benefit, including real estates agents, builders and other trades, home maintenance companies and conveyancers.

Why can't banks just lower their rates?

Even with the recent write downs announced by banks like ANZ and NAB, in general terms, our banks have always been far more prudent with their lending than their US counterparts. With the odd lapse now and again this prudence has become a feature of the Australian Financial system for a number of social, political and economic reasons. Despite the way we disparage our politicians, Australians display a broad cultural acceptance of government that allows regulation, prudential supervision and legal safeguards against the sort of reckless behaviour that has permitted what has now become known as "the US sub-prime crisis".

As Saul Eslake from ANZ bank points out, despite the current turbulence,

"Australian banks are still profitable and still adding to their capital and therefore to their capacity to lend. However, the Australian banking system has at least one point of vulnerability – we don't save enough in the form of bank deposits to finance all our loans. This means the banks rely on "wholesale funding" for the difference. This difference is reflected in Australia's large current account deficit that requires overseas borrowings by Australian banks to finance it."

That overseas borrowing has become more expensive since the financial crisis began to unfold in August last year and dramatically so over the past two weeks as the crisis has deepened. This upward pressure on funding costs is the reason banks have raised their rates on top of the increases that were handed down by the Reserve Bank in recent months. If things continue as they are and the Reserve leaves its cash rate at the current 7 per cent, its quite concievable the retail banks would have to begin putting their rates up if they want to contine lending at their current levels. To leave their lending rates where they are would mean, in the short term, they would have to restrict their already reduced levels of lending. Either outcome would have catastrophic consequences for our economy as credit for business investment, housing and consumer goods either dried up or was priced beyond reach of most borrowers and crippled those already in debt.

However, this is not going to happen. The reason the RBA cut rates last month is because they see a slow down in the economy as potentially more damaging than any lingering threat of inflation that last caused it to raise rates back in March. Inflation will still be on the RBA's radar but the onset of recessionary conditions in the US and elsewhere globaly (New Zealand is already in a technical recession) will help to kill off any immediate inflation worries. We are already seeing markets forecast lower global demand in the falling price of oil. The reason the Australian Dollar has gone from US$0.96 to $US0.78 in just a few weeks is because of the expectation that commodities like coal and iron ore are going to be affected by lower global demand.

The Reserve will want to see retail interest rates continue to fall in an effort to stimulate a faltering economy and it will cut the official cash rate when its board meets next Tuesday. If they want to see retail banks pass the rate cut onto customers, then the cut will need to be a generous half of one per cent because the cut given to customers by the retail banks will definately be more modest.

(References: Saul Eslake, ANZ Bank. Cited in The Sydney Morning Herald, 30 September 2008)

First home saver account facts

• Only first home buyers can apply.
• You must be between 18 and 65.
• Limit one account per customer.
• You must save $1000 a year to get the 17 per cent government contribution.
• You can't take the money out until you buy a home at least four years down the track.
• If you change your mind about buying, the money goes into your super fund.
• Earnings are taxed at 15 per cent.

Extra money towards your first home

The burden of saving for your first home has never been greater but, for those saving to purchase in a few years time, the job might be just a little bit easier. From today the federal government’s First Home Saver accounts become available.

If you're saving to buy or build your first home then a first home saver account may suit you. The accounts are complicated by a few rules and regulations but in essence they allow you to attract a contribution from government of up to $850 a year and the tax on the interest you earn is capped at 15 per cent (the same as your superannuation).The overall account balance will be limited to $75,000 and a minimum of fours years needs to pass before the money can be withdrawn to buy a home. The real bonus is that operating one of these accounts doesn’t disqualify your eligibility for the First Home Owners Grant Scheme (FHOG).

To earn the maximum government contribution you need to have saved $5000.00 per year yourself. The contribution is calculated as 17 per cent of the amount saved in each year (17% of $5000.00 = $850.00). If you can achieve this for 4 years you will have $23,400.00 saved which includes the government contribution plus any interest you have earned (less some tax at the lower rate). Add to this the FHOG of $7,000.00 and you’ve got yourself a tidy deposit of just over $30,000.00.

This represents a 6 per cent deposit on a home with a price of $500,000. With the recent exemptions from government stamp duty on homes up to this amount, $30,000.00 will go a long way towards getting you into your first home.