Perth Housing Bubble Forces WA Govt. to Subsidise Homes Up to $365,000


MELBOURNE AUSTRALIA (Daily Reckoning): You may recall during the early days of the Australian Daily Reckoning we reported on a madcap scheme from the UK where the government was looking to make private housing more affordable by taking an equity stake in the homes of first home buyers and the less well off to allow them to start their climb on the ‘property ladder.’

It was apparently the brainchild of UK finance minister, the Chancellor of the Exchequer, Gordon Brown – now the soon to be UK Prime Minister.

In the UK, the scheme was split into three different plans, the “Social Homebuy,” “New Build Homebuy,” and “Open Market Homebuy.”  All three plans claim to be aimed at assisting the lower paid and those in private rental accommodation to buy their own home.  Or rather, to co-own a home with their former landlord or with the government and lender.

But it is also aimed at what the government calls “key public sector workers.”  As if the only “key workers” are those that grace the halls of the public service.  There couldn’t possibly be any “key workers” in the private sector could there?

Australian Daily Reckoning reader, Luke from Perth, brings to our attention to the Western Australian government’s new “First Start” programme which trumpets the claim that it will help “3,000 Western Australian families to own their own home.”

The plan will involve the WA government taking an equity stake of up to 40% in the homes of 3,000 families over the next three years, with the maximum property price being $365,000.  The government even assists by providing a list of the suburbs where it would like to buy these houses.

Luke wisely asks if this is “some hair brained government intervention in the free markets to prop-up a sick looking real estate market?”  He goes on, “I can’t help but feel that this is an artificial propping up exercise, but am I right in saying that?”

One of the things that it does prove is that governments of any flavour find it impossible to keep their hands out of the realm of private enterprise.  Typically, a bunch a politicians who have little to no experience in the private sector seeing as they have come from a legal, teaching, trade union, etc., background, suddenly believe they can determine the prices in the property market for themselves.

The reality is that the Home Start plan will most likely achieve very little and probably will not provide more affordable housing for any more than a few ‘lucky’ punters that get in early.

Now, it won’t be the case that all of a sudden all of the houses in the specific suburbs will suddenly rise to $365,000.  For the most part supply and demand will still actively play its part.  However, government interference will help in distorting the market as property valuations (not values, there is a difference) rise to take into account the government funding.

With the government taking a 40% stake in someone’s new home it means the borrower can look at more expensive properties, and as long as they are happy for the government to be co-owners then they will get the bigger home.

This alone could – and we emphasise could – lead to a bubble in the “affordable” end of the property market.  But what happens when the property market takes a turn for the worse?  Those property values that have been artificially inflated will be the first to feel the heat.  And what happens after the government ends the Home Start plan in three years time?  The number of buyers at the threshold level will surely drop-off as the government is no longer subsidising home ownership.

The private sector housing market may not be perfect, but at least it doesn’t require taxpayer funding to help distort the market.

Kris Sayce
for The Daily Reckoning Australia

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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