Monday, 26. April 2010 18:50
I was surprised to read this weekend, that Paul Brennan (Chief Economist, Citigroup), was “.. a little surprised by the extent of the pullback in the appetite for housing finance as interest rates are only back to around normal levels”. The explanation proposed to support this strange phenomena was “It seems home upgraders and investors are yet to fill the gap left by the departure of first home buyers following the reduction in the first home owner grant”(1).
In laymen’s terms, they were surprised that extracting money from the future cupboard, to pump in to the present cupboard, left the future cupboard a little, shall we say, bare.
I’m not surprised at any of this at all. The Home Vendors Grant, and lets call it for what it was, was a method deployed to prop up the value of the residential housing market. Nothing more. Because the residential housing market props up the balance sheets of banks. The banks prop up the balance sheet of the whole country, including your and my superannuation. As much as we all like to beat up on banks, we need strong and healthy banks. But what I question, is calling the buyers grants anything more than price supporting grants. They were to support the seller, not the buyer, by driving up demand and price. An artificial distortion.
This is a noble goal, to support the economy in a time of need, however economists are now noting, some, surprisingly, are surprised, that this bought forward spending and has left the present a little bare. So with property values at higher levels than ever before, in real terms against real incomes (i.e. more expensive than ever before), this whole structure appears to be even more delicate.
Furthermore, it does not seem to be widely recognised that houses don’t *produce* anything, they do not add any value to the economy apart from to support the social and physical needs of people who go out and participate in the productive economy. So an ever increasing proportion of the Australian economy, is being consumed, and deliberately diverted, to support that part of the economy, that produces nothing.
I do not hold a fundamental objection to stimulus spending in time of need. We all use our credit cards from time to time if we’re a bit short. What we don’t do is go and put a $50,000 Land Cruiser on the house credit card (or do you?). That would be regarded as an unwise investment in to a non-productive depreciating asset.
For some reason, we do precisely the opposite with housing, whereas in our private lives we may prefer to invest in our education, training, or relocation to an area of higher demand for our skills for greater economic reward.
Similarly with the Australian economy. I am surprised that anyone is surprised, that the most expensive, most consuming, and least productive part of the economy should experience any decline in demand, however temporary.
A more prudent use of economic stimulus, would be to invest in productive infrastructure and to support our national economic strengths beyond mining – being education, financial services and so forth. I.e. invest in the *productive* sector.
What is then *produced* by such national investments, would yield a long term dividend to all, through direct employment or an improved government revenue. This dividend, of which we *all* benefit (all companies pay 30% corporate tax, before we consider our superannuation fund investments), would subsequently support the value of the residential housing sector and help avert the price decline that we all seem to live in eternal fear.
When the residential housing market is considered in this light, it should come as no surprise that a sector of the economy, that does not actually produce anything, should not always go up.
Maybe… some people realise that investing in something, that actually produces something, may sometimes, be a smarter investment.
(1) “Some wild cards in a winning economic hand“, Australian Financial Review, April 23-26 2010, pp 56-57.
