The extension of time for the enhanced first home grants puts more borrowers at risk of default, as the spectre of double-digit unemployment looms, an academic says.
University of Western Sydney Associate Professor of Economics and Finance, Steve Keen, said the federal government’s decision to extend the period for the enhanced grants would benefit sellers.
“It is really asking first home buyers to take out leveraged positions to boost the economy at a time when it is very likely the economy is going to go very cactus and so are house prices,” Professor Keen said.
“I am calling it the first home vendor’s grant.”
The government announced in this week’s budget that the boosts to the first home owners grant would be extended by six months to the end of 2009.
Last October, the boosts were doubled to $14,000 for existing dwellings and tripled to $21,000 for newly built homes.
Between October 1 and December 31, the boosts will be halved, with first home buyers receiving $10,500 for existing homes and $14,000 for new homes.
From January 1, 2010, the first home owners scheme reverts to its original $7,000.
The federal government in the budget lifted its forecast for unemployment to peak at 8.5 per cent in the June quarter of 2011.
Professor Keen said he was despairing about the nation’s jobless rate.
“It is more likely that unemployment is going to go through the roof where people will lose their jobs and have defaults and mortgagee sales,” he said.
“I am expecting at least 15 per cent unemployment in this crisis when it finally bottoms, but that won’t be for two or three years,” he said.
A surge in the unemployment rate would place pressure on banks as the number of bad loans was expected to increase as a result, Professor Keen said.
“They will get a far higher level of default than they expect,” he said.
“Of course, that will cause plunges in house prices through mortgagee sales and what goes with that.”
Professor Keen, while wary of debt, said the federal government had little choice but to enter into a deficit.
A record deficit of $57.6 billion, or 4.9 per cent of gross domestic product, was forecast by the federal government in its 2009/10 budget.
“This is too big a crisis to be turned around by government borrowing, but they have to go into deficit right now because their revenue has fallen, the economy slumps and their expenditure rises,” he said.
“It’s quite natural to go into a deficit and it does to some extent stabilise the economy.”