It’s our turn to borrow now as the stimulus package changes

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The stick of the national debt is handed over from the government to the households.

To be more precise: the economic stimulus package has gone from the government borrowing money and giving it to individuals and businesses, to the government offering to help with the deposit on a new home.

In other words, the government restricts its own borrowing by forcing households to borrow instead.

A better way to put it comes, as you might expect, from Housing Minister Michael Sukkar: it is now a “recovery through construction”, which is true, but it is also a recovery through private debt, successor to the government debt-led rescue of 2020.

To use the $ 25,000 (until December 31) and now $ 15,000 (until March 31) HomeBuilder Grant to build a new house, the lucky winner would have to borrow at least $ 400,000 and up to $ 800,000, which should be a snap since the government wants to abolish responsible lending laws.

But free government money is very attractive, even if you have to go into debt to get it.

Mr Sukkar reported a week ago that 75,143 people had applied for a grant, 80 percent of them to build a new house and 20 percent to “rebuild” (not sure what that means). He went on to say that it will support “up to $ 18 billion in residential construction.”

Sounds a little light, to be fair, since that equates to $ 240,000 per house, but there is no doubt that a construction boom is underway and there is a long waiting list for them. builders and traders.

The industry is flat, and will be for a year or more. I couldn’t be happier.

Assistant Treasurer Michael Sukkar is happy to trust a “construction-led recovery”. Photo: AAP

Meanwhile, ABS reports home loans in November stood at $ 24 billion, up 24% from a year ago, with homeowners increasing their debt by 31%.

The figure for December, which is due out in a few weeks, could be a multiple of that figure, because according to the Housing Industry Association, new home sales in December were 99.5% higher than a year ago.

This is because people rushed to get their contracts signed before the HomeBuilder grant was reduced from $ 25,000 to $ 15,000.

It will be reduced to zero on March 31, so there will undoubtedly be another rush before that date.

The HomeBuilder Construction Stimulus Program has been “a phenomenal result for our businesses,” says Mr. Sukkar. Photo: AAP

And as Mr. Sukkar puts it, this is “a phenomenal result for our businesses and our economy”, especially since the construction industry was looking into the abyss of zero immigration and zero demand for housing. barely nine months ago.

And yet… I saw a 23-year-old single woman on the news the other night happily talking about the house she was building in Armstrong Creek near Geelong for $ 500,000, supported by the HomeBuilder grant plus a Victorian grant for the purchase of a first house and concession of stamp duties.

The amount of her loan was not discussed, but it would be a huge one for her.

Has the bank lent her responsibly, making sure she could afford to pay it back, now that responsible lending laws are in play?

We do not know.

She brilliantly added that 10 to 12 of her friends were doing the same thing, in the same suburb.

Australian household debt now accounts for 120% of GDP, or more than $ 3 trillion, which also represents a record debt-to-income ratio of nearly 200%, one of the highest in the world.

The global median debt-to-income ratio is 120%.

It’s hard to know how much this bothers you.

After all, while the debt-to-income ratio has fallen from 60% to 200% since 1990, the interest-payment-to-income ratio has fallen from 10% to 6.4% over the same period, due to the huge drop in interest rates.

Obviously, if interest rates were to rise significantly – or not at all – there would be an explosion of mortgage stress, but for now all is well.

housing-loan-savings-interest-rate
Mortgage and savings rates fell to historic lows in 2020. Photo: TND

And in an article published last year titled “How Risky is Australian Household Debt”, Reserve Bank researchers said: “A large but plausible drop in asset prices could lead to a substantial drop in consumption.”

Meanwhile, the Australian government debt now stands at $ 812 billion, or $ 241 billion more than a year ago (and $ 550 billion more than when the Coalition came to power, denouncing Labor debt, but that’s another story).

Most of that additional $ 241 billion in debt in 2020 is still in private bank accounts, not because the interest rate on deposits is attractive, but because it just couldn’t be spent on it. lockout.

This will likely lead to a consumer boom this year that will add to the construction-led recovery.

The two threats to this very good economic outlook are on the one hand, if the RBA raises its rates prematurely and on the other hand, if the coalition government goes further than not increasing its debt – forcing households to borrow instead – and decides to impose fiscal austerity to reduce it.

On Wednesday, we learned that inflation has remained in a coma, and there’s not much chance that RBA Governor Philip Lowe will keep his promise to leave rates where they are for three years.

Reserve Bank of Australia Governor Dr Philip Lowe could help by keeping interest rates at historically low levels. Photo: AAP

As for fiscal austerity, the RBA could help.

The central bank bought half of the new debt issued by the government in 2020, or $ 120 billion.

It was not bought directly from the government to preserve the fiction that it does not directly fund government spending by printing money, but most of the time bonds are only held by private investors for a few. minutes before the RBA buys them.

Either way, what if the RBA waived these obligations? Absolutely nothing.

Government debt would drop by $ 120 billion in an instant, the RBA would declare a paper loss of $ 120 billion, and its accountant would need fragrant salts and a cup of strong tea, and life would go on.

As it turns out, a debate is underway as to whether the European Central Bank should cancel some of the $ 8.5 trillion in government bonds it currently holds and let European countries get away with it.

In fact, could the RBA buy the $ 812 billion in Australian government debt with newly printed money and then cancel it?

Well yes, except all that extra money in the system could cause inflation, depending on what was going on with the economy’s ability to meet the extra demand.

But that could be better than crushing austerity in order to generate surpluses and pay them back.

Otherwise, they might just not be worried about debt like 20+ year olds applying for HomeBuilder Grants.

Alan Kohler writes for The new daily twice a week. He is editor-in-chief of Eureka Report and financial presenter on ABC News

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