Quick take on fiscal stimulus package

I’ve been responding to quite a few media questions about the government’s fiscal stimulus package and I haven’t had time to formulate more than a dot-point response. So here goes
* The size of the package is about right and it makes sense to announce it now
* The help for pensioners and low-income households is well-targeted to meet both policy objectives and the need to bolster demand
* I’m less impressed by the increase in the First Homeowners grant. In the long run, this scheme has been part of the problem of high housing costs, not part of the solution. Maybe the government has information suggesting the possibility of a rapid collapse in the housing sector, in which case some sort of emergency stimulus might be necessary. But the medium term direction of house prices has to be down

I don’t think that differs much from the par response from economists, but I’d be interested in readers’ thoughts

Update 19/10More on this from Tristan Ewins

62 thoughts on “Quick take on fiscal stimulus package

  1. Given every buyer for these spec housing commission flats off the plan (the architects did sorta try to disguise them), and if they lose the sob story and have to settle, I wonder how long it will take some bright spark to offer a new plasma for select struggletowners, willing to sign some first home buyer paperwork. They’ve got $21000 to play with now, by all accounts.

  2. To PML at comment 43. Good one. You do seem to have a good sense of humour at the right time.

  3. #36. BilB, Your proposal is, IMHO, an excellent refinement of the Government’s “… strategy”. Have Uni chiefs suggested it to the government? I wonder how some partially privatised Universities would view your proposal.

    #40. Jill, I did argue for the creation of additional public housing at the time, not long ago, when ‘housing shortages’ and ‘unaffordability’ were the issues. I was under the impression that the Government has budgeted for additional money for the public housing program. I fully agree with you that creating more public housing would also provide support for the building industry in the sense of providing work. However, I’d be surprised if first home buyer grants would be appropriated by landowners as easily under current conditions as say 18 months ago. But then only time will tell. As JQ said, the Govt may have some additional information.

  4. Smiths, you say there is not one shred of evidence to support my contention that a lack of supply will support house prices, but then follow up with an abitrary statement that you believe there will be a 40% fall in prices.

    Such a fall would suggest severe recession, something which I believe would see the RBA cutting the cash rate to something with a 3 in front.

    My contention is based on the significant housing underbuild in recent times.

    If you go to the ABS website, download the dwelling approvals data and the civilian population estimate from the labour force release you can construct a chart of the approvals to population ratio. This you will see shows there has been a significant underbuild for a number of years now.

    Nick K, if you find the belief of a housing shortage amusing, you haven’t been paying attention.

    The size of houses has nothing to do with whether there is a shortage of housing or not. Selling up and moving to more modest accomodation won’t do anything to relieve demand pressures, unless of course you think we are moving into a time of mass share housing.

    I’d be interested to know why you believe the demand for housing is so elastic that the huge underbuild of recent years has not led to a shortage of housing. Your contention that there is no fixed supply of housing is certainly novel. Are you suggesting dongas for the major cities perhaps?

    I’m always willing to change my opinion, it wouldn’t be the first time. You have to present some sound reasoning though and your initial effort was poor.

  5. Actually Smiths, I’ve changed my mind already. I don’t believe we would see a 40% decline in house prices with anything short of depression and severe social dislocation.

    In that case you can pick your own low for the cash rate.

  6. Governments of both persuasions are terrified of the spectre of any sort of deflation in the housing sector. That is why both have supported high immigration rates. If we get to the point where we are regularly using the D word then it will appear to have been an extremly flawed policy.

    According to a report I read in The Australian last week, Rudd has already hinted that the government would cut the immigration rate if the economic situation deteriorated.

  7. sdfc, just to clarify my position.

    I wasn’t denying that there is a housing shortage at the present time. That is, there is more demand than supply.

    All I am saying is that those dynamics can change quickly, Particularly if there is an economic downturn. The relation between supply and demand is not fixed.

    As for the elasticity of supply and demand, I agree that there is less elasticity on the supply side. But there is considerable elasticity on the demand side.

    If there is an economic downturn, the demand for housing will fall. If people can no longer afford to pay their mortgages, then more people will have to sell and move to smaller homes. Some people will move in with family and friends, or combine households. Younger adults will be less likely to enter the property market until prices fall. This will all contract the demand side.

    The point is that there is no fixed relationship between supply and demand that will put a floor under house prices. There is a lot of flexibility on the demand side.

    The only thing which puts any kind of floor on house prices is that if prices start falling, investors are less likely to build new homes as they know they are unlikely to realise any profits in a falling market. This stops the supply side from expanding. But I doubt this will be enough to stop a big drop in house prices.

  8. Okay Nick fair enough.

    I don’t agree there will be any significant economy wide fall in house prices, but that’s life.

    Don’t be fooled by the big falls in US house prices, there are huge differences between the US and Australian housing markets. They built a bucket load of houses during their boom, we didn’t build enough.

  9. As a 23 year old, I welcome falling property prices! Maybe some wealth will be more evenly distributed throughout our society.
    How can young people ever get into the property market when they are forced to pay the mortgage of some X5 driving baby boomer investor every week. It’s honestly like the feudal system of the middle ages the way wealth is controlled in Australia.
    The FHOG is a scam, it only serves to suck more young people into an unsustainable property market. One day it’s going to crash and that’s just going to be too bad for a lot of dumb and greedy people.
    As for older people losing a lot of their super, that’s what happens when you invest your money in stocks fools! It’s like going to the casino, losing half your cash, and then having a sook about it after, like you are a victim or something and you really couldn’t afford to lose that. It was your decision to invest in shares and you probably made a killing during the commodities boom. Some of us elected to save our cash at a bank and why should we bail you out?
    In fact, people shouldn’t even be allowed to invest in high-risk super when they are old, because when it all goes topsy-turvy it’s GEN Y that’s going to be paying their pension.
    The stimulus package won’t give me any money, I’m not going to be wasting it. Can somebody please explain how pensioners buying dog food and burning money on christmas presents is going to save our economy?
    Wouldn’t the stimulus money be better spent investing in sustainable energy, free and better public transport? That would save both the environment and heaps of money in the long run.

  10. Today (18/10/08), Paul Krugman, the latest Nobel Laureate in Economics, called on the managers of the US economy to increase Government particularly infratructure spending. Yet in Australia Rudd has announced serious cuts in Government spending on health and education and deferred spending on essential infrastructure. Are these two policies reconcilable?

  11. John, if I may reply to Herbert Stock by saying the procrastinating Rudd government is making
    ad hoc decisions which in my opinion have not been properly thought through as is the case with the government’s stimulus package whereby those in real need of a helping hand are being left out in the cold.


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