Wednesday, November 5, 2008
Kevin Rudd made a very popular decision recently to increase the First Home Buyer’s Grant from $7,000 to $21,000 for newly-built homes. While this appears to be a generous bonus for first home buyers, in reality, nothing could have been further from Rudd’s mind.
One of the most reported outcomes of the Great Depression in the 1930’s was the ‘run’ on the banks, when people began to realise that the money they put in the bank doesn’t just sit there on a shelf gaining interest – it needs to be invested somewhere else to do that. This is how banks make a profit. Back then the banks relied on the fairly safe assumption that every person won’t want all of their cash at the one time. As we saw, people got scared, and the banks assumed wrong.
With the news of the ‘economic crisis’ spreading to Australia, Rudd made two moves to help support the banks. First, he guaranteed people’s savings so that people would feel safe leaving their money in their accounts, which the banks actually have invested elsewhere.
Secondly, he announced that he would triple the First Home Buyer’s Grant.
Why is this such a bad thing? Let’s face it – two days before the announcement, if someone told you to go to a bank and borrow $400,000 to buy a house, you wouldn’t touch it. Now, first home buyers (generally those at the lower end of the economic spectrum) are going to be falling over themselves to take advantage of the offer.
Put simply, Rudd’s plan is to support the banking system by encouraging people, particularly those who can least afford it, to jump into massive borrowings and personal debt. He’s trying to solve the current economic problems caused by the banks by using a taxpayer-funded carrot to get everyday people to borrow more from them.
But perhaps the most conflicting news came two weeks after Rudd’s announcement to triple the FHBG, when the first of the Big Banks announced that even amidst the ‘economic crisis’ gripping the world, they’d cleared $8 billion in profit. That’s one company with a profit equal to more than one third of the entire nation’s budget surplus.
So wouldn’t it be fair to ask for some of that taxpayer-funded $21,000 back? After all, that $8 billion profit of just one bank is roughly equivalent to 381,000 First Home Buyer Grants, and I just don’t see there being that many first home buyers out there at the moment.
At the end of the day, a mortgage is an exclusive relationship between a home ‘owner’ and a bank. It does not benefit the greater society in any way. The home ‘owner’ gets to borrow a house to live in. The banks get to reap in profit from the repayments (a $400,000 mortgage at 7% over 30 years will reap in nearly $560,000 in interest repayments, on top of the original $400,00 which needs to be repaid – that’s nearly $1 million in total). This is then invested elsewhere, for even further growth.
I guess my question is, if the banks require lucrative carrots to be thrown about to keep them in business, why does it have to be the taxpayers funding it? I pay my taxes for the government to build roads, schools, hospitals and getting me a better seat at Subiaco stadium. Surely the banks can take $21,000, or even more, out of that $560,000 interest and still turn a healthy profit?
