Troubling times ahead…

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I have been watching the global economic crisis unfold both here and in the world market, and I must say, the events of the past 2 weeks are really not a big surprise to anyone who has been paying attention.

Today, the Rudd government announced more injections into the economy, to try and boost consumer confidence, by giving pensioners and families one-off bonuses. Last week, he also guaranteed all bank deposits, and has committed to additional government spending. I am supportive of all of this, as it will allow us to (temporarily!) weather the international storm.

But Rudd has made one huge mistake, which I think may actually be a nail in the coffin for the Australian economy and for consumer confidence. He has increased the First Homebuyers grant from $7000 to $14,000 (or $21,000 if you build). This has disaster written all over it. The original $7000 (and $14,000 for a little while if you built) put massive inflationary pressures not only on established housing in older suburbs, but on the crappy estate housing as well.

The average mortgage payment for us, if we were to enter the market right now, would be at least $1000 per week. This doesn’t include rates, or anything other than just the mortgage. We earn well over $100,000 a year and we still would find it extremely difficult to make those sorts of payments. And that is for the crappiest houses in the crappiest suburbs. We are better off than the great majority of people in Perth, and yet we sure as hell can’t afford a house! So I wonder how successful any attempt to get people to enter the market now is going to be. It’s going to seriously hurt middle and low income families.

Housing in Perth is ridiculously and artificially overpriced. Those that jump on the $21,000 grant are most at risk, because they are buying when the market is at a premium, and building in those shitty estates that are most vulnerable when the housing market shifts. Those in the $14,000 bonus gap can potentially do OK, but a lot of housing is currently overvalued and WILL DROP. Prices have already dropped by around $50k in many suburbs, and it is on a downward spiral.

Rudd has effectively made a cataclysmic mistake in trying to put people into inflated mortgages. It will come unstuck. They WILL foreclose on their houses, and it will be the same downward spiral that was inevitable anyway, just with a whole lot more casualties.

What are we going to do? Right now, every single cent we earn is going into paying off credit card and personal loan debt, and then saving the rest in term deposits. We will strike when the market collapses, and be in a good position to get finance because people like us will be hard to find in a year. The money I get from the government for the kids and the baby bonus will all be put into savings, not spent at Toys R Us at Christmas. And eventually, even though we will have to rent for maybe another year or two, we will then buy a house at a reasonable price, with a comfortable life.

As lovely as it would be to buy a house (we have considered it at various points throughout the last 5 years and have had opportunities), I think anyone who enters into a mortgage right now is either extremely stupid, or extremely brave. I hope for many people’s sake that people realise how damaging this grant could be (doubt it… estate bogans I am looking at you), but it is going to be very, very tough to recover if, and when the housing market collapses and you are left with a mortgage that is nearly double the actual value of your house.

This is a very real possibility, and I hope that the government rethink the grant. It was the original grant that fucked everyone up in the first place.

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