It sounded like great news for all of those we know who are struggling to buy their first home didn’t it? Our generous Victorian Government was actually going to do something to give them a hand by removing the duty altogether for purchases up to $600,000 and reduce the cost pro-rata up to $750,000. At last, something concrete.
Now not to be too harsh but there was already a 50% discount for First Home buyers in place prior to the announcement. But that’s not really the point. Just think through the process that happens in practice. There are a limited number of properties for sale at any one time. What do the sellers want? Yes, you guessed it: the maximum price. What do you think might happen when the same number of properties are available but the Government offers to provide more buyers with some extra capacity to pay a bit more? Yep, you’re right. But it actually gets worse…
As the article below explains well, this concept has been seen before and the only thing that the Productivity Commission got wrong in their report over 10 years ago, was in underestimating the impact on prices that results from the well meaning intervention by the Government. Ceteris paribus, which is Latin for all other things being equal, the prices go up by more than the extra money provided to the poor buyer. This is because the extra cash increases their ability to borrow.
Economics doesn’t always run smoothly and many may not be willing to act on this advice, but bizarrely, our First Home Buyers may find themselves better off by buying before this new measure takes effect. Really sorry to have to rain on the party when it only just started.
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