Could the first home-owners grant lead to housing bubble?

Ralph Norris Commonwealth Bank's chief stated earlier this week that the Rudd Governments' first home-buyer grant could lead to a residential property bubble if it became a permanent fixture in the housing market.

Mr. Norris went on further to suggest that although most home lenders and brokers were pushing to get the first home owners grant extended beyond June such a move could tempt borrowers with little to repay debt to enter the market.

Mr. Norris also felt that the first homebuyer grant had provided quite a stimulus to the market, but that we needed to be careful that this didn't become an open-ended offer. If one thinks back to the sub-prime issues that we had to deal with earlier this decade then we need to be reminded that they were largely brought about by people being encouraged to borrow who couldn't afford to borrow.

Due mainly to the incentives the CBA has had record mortgage volumes in January and February. The bank was even forced to hire more staff to clear the backlog of mortgage applications since the grant was first introduced last October.

When posed with the question of whether a bubble was developing, Mr. Norris stated that he didn't think so, but that if it became a permanent fixture in the home loan system it could cause some concerns.

He did however question whether the funding and deposit guarantee had made the banks hostage to the Federal Government. He went on to say that the major banks did not need the governments' guarantee on deposits, and that as far as he was concerned the guarantee was obviously put in place to create financial stability for the system. The major banks had no need for a domestic guarantee and really it gave some protection to the smaller banks that were experiencing a significant outflow of funds during the previous year.

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Published on March 3-th, 2009 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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