Baillieu doubles Victoria’s debt to make housing even less affordable

So the Baillieu government is going to double Victoria’s debt so that it can, for example, slash stamp duty for first home buyers – inadvertently making housing even more expensive. Which is great news for Victorians… who own investment properties and/or real estate agencies.


What can I say? I just really like real estate agents and wealthy people.

The thing is, throwing money at first home buyers – in the form of grants, or in the form of stamp duty cuts – only increases their debt, because it’s a competitive market and for every ten thousand dollars available to a buyer the bank will lend them many times more, which inflates the market and sends them deeper into debt; and because when you cut stamp duty the extra money goes to vendors, increasing the equity of existing homeowners and therefore the amount of money that banks will lend them to outbid a first homebuyer to buy that house as an investment property.

What I didn’t expect was to hear condemnation of this sort of policy from Andrew bloody Bolt, who describes it as “Taking your money to make the young lose theirs”:

Gosh, who’d have thought that a government scheme to bribe the young in to taking on big debt would lead to trouble?

…Taking money off some people to lure other people into deep debt. Brilliant skills.

Now Bolt there is talking specifically about the first home buyer grants, but the same principle applies to stamp duty cuts, which are also going to have to be paid for by other taxpayers.

Let’s hope he’s willing to specifically damn Baillieu’s appalling (and very expensive) new homeowner debt-driving policy in the same way as he damns Federal Labor’s.

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11 responses to “Baillieu doubles Victoria’s debt to make housing even less affordable

  1. Your grasp of economics is rather poor, or it is revolutionary.

    How does a tax cut make something less affordable?

    How does a tax cut increase other people’s taxes?

    If cutting tax makes something less affordable, does increasing tax make it more affordable? If you increased stamp duty ten-fold, would that suddenly make houses extremely cheap?

    You should publish your theories and could be looking at the Nobel Prize for Economics!

  2. “How does a tax cut make something less affordable?”

    As I said above:

    when you cut stamp duty the extra money goes to vendors, increasing the equity of existing homeowners and therefore the amount of money that banks will lend them to outbid a first homebuyer to buy that house as an investment property.

    If the bank will lend someone $300k and stamp duty on a $270k house is $30k, then they’ll bid up to $270k. If the stamp duty is nothing, then they’ll bid up to $300k. As will all the other first home buyers. Therefore, the house itself is now worth more. Therefore, investors – who have existing houses kind of by definition – will have more equity in those houses. Therefore the banks will lend them more – and, because you can borrow a lot more than just the equity/deposit, a lot more. Therefore, even though they don’t get the stamp duty cut themselves, they’ll be able to push prices up further.

    QED.

    “How does a tax cut increase other people’s taxes?”

    To account for the funding shortfall. Alternatively, a tax cut involves cutting necessary services to others. The point is, that tax cut has to be compensated for somehow.

  3. returnedman

    Looks like that Nobel Prize is in the mail, Jeremy …

  4. jordanrastrick

    Sadly, Jeremy’s been beaten to the punch:

    http://people.anu.edu.au/andrew.leigh/pdf/StampDuty.pdf

    Of course, Stamp Duty is inefficient and should be replaced with a tax that operates in a similar fashion but on an ad-valorem basis….

  5. I know it rankles, but it’s nice to see you credit Bolt for saying something right once in a blue moon. Not that I’m any fan of the man, but judging arguments on their merits rather than on the political colours of the person making them is what separates us from… well… people like Bolt.

  6. Cheers, Mitch – and I have no hesitation in doing so, because I’m much more interested in the argument than the arguer. (Also, even a stopped clock, etc etc.)

    From the study Jordan cites:

    “Ensuring that brokerage fees do not rise when stamp duty is reduced should be a priority in any such policy reform.”

    What’s the bet that the real estate industry’s best buddy Ted Baillieu has done no such thing?:

  7. I’m stunned!
    A rich real estate agent* who likes rich real estate agents – well I never!

    Bolt saying something not-very-nice about the “Toorak Toff”… I don’t blame you for savouring the moment (you know, while it lasts)

    And Freddie, unless you can explain how tax cuts increase tax revenue (hi Mr Reagan), you should probably refrain from economic commentary altogether.

    *(we couldn’t have ALL forgotten his fire sale of 300 schools, causing the development market to redline)

  8. jordanrastrick

    Tax cuts can increase tax revenue via two mechanisms, but neither of them is likely to be applicable in this case.

  9. Pingback: Shoddy Frankston rail line results in new local member who thinks being gay is equivalent to dangerous driving, assault and murder | An Onymous Lefty

  10. between the state debt and federal debt theres going to be some interesting times ahead

  11. jordanrastrick

    Our total state and federal government debt is tiny and, unless China suffers a catastrophic crash, likely to evaporate very soon.

    What we actually need to worry about is private sector debt, especially that which is tied to what could well turn out to be a massive housing bubble.

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