Gorge Season

First home buyers continue to gorge at the trough of cheap debt, when compared to those already with a foothold on the Australian property ladder.

Mortgage sales of $800 million to first home buyers were recorded by Australia’s largest broker Australia Finance Group (AFG) in March 2009, or 28 per cent of all mortgages, compared to just 11 per cent in the corresponding month a year before. AFG writes one in ten mortgages in Australia.

The first home buyer frenzy is masking the fact the more experienced property investor is much less active in the current market, taking a more cautious approach.

Of major concern when considering this inexperienced property purchasing segment of the market, is that loading up with cheap debt during times of unstable economic conditions should be discouraged, not encouraged, with a carrot of the government first time home buyer stimulus.

As you know, Prime Minister Kevin Rudd announced on Sunday that the Government and the big four banks, which control around 80 per cent of the residential lending market, had agreed a set of common principles for borrowers struggling with mortgage payments, such as in the event of job loss.

Rudd said, “The Government’s purpose in its negotiations with the banks has been clear – to ask the banks to provide maximum flexibility for borrowers suffering temporary hardship through enforced unemployment for the 12-month period ahead”.

Australia is facing rising unemployment, uncertain local and global economic ramifications on the back of the continuing unfolding global slowdown, with the government on the one hand offering cash incentives to those wanting to borrow money, and then with the other hand offering a safety net for them when things go wrong.

Glenn Stevens, Reserve Bank governor, highlighted some of these economic concerns in his monetary speech this week, after Tuesday’s announcement of a 25 basis point reduction in official interest rates to a 49 year low of 3 per cent.

“The Australian economy is contracting, though by less than those of its trading partners.

“Capacity utilisation has fallen from its peak, and will decline further over the rest of the year.

“With demand for labour weakening, growth in labour costs will probably also fall”.

A contracting economy, capacity utilisation falling and with demand for labour weakening, encouraging the financially inexperienced to plunge into debt should be the last thing the government should be encouraging.