Poor Policy dressed up as a Good Idea

Now I don’t want to be a party pooper – but it’s a seriously *stupid* idea for the federal government to prime the real estate market with yet more dollars by way of the "first home owners grant".

Because that was a big contributor to this mess in the first place.

The OECD and others have been warning for a long time that Australian real estate is seriously overvalued – to the tune of 50%. The bubble that started inflating at the beginning of this century has yet to deflate.

There was an opportunity with the current financial crisis to fix this distortion and to allow prices to come back to a reasonable level – albeit one that would mean that punters would have lost some of their gains – and state governments would have had to get smarter with their land release strategies.

This is what I was expecting to happen – but Kevin and Wayne have obviously been convinced that a hit to housing would have a large impact on the broader economy.

This intervention has got Treasury’s fingerprints all over it. And all it will do is defer the moment when the hit to real estate will have to be taken and prices come back into line with what is happening in the US and the UK.

It’s not a very smart approach to keep propping up real estate so that prices stay 50% or so higher than the rest of the world – just to keep the punters on-side.

My sense is that they might be successful in the very short term but eventually the piper will have to be paid and we will see a decline in values – my guess is that Kevin probably won’t want that just prior to the next election.