Housing grants a “poisoned chalice” that create bubbles and leave buyers worse off: Steve Keen

Economist and property bear Steve Keen says housing grants are a “poisoned chalice” that inflate house prices leaving first-home buyers worse off, not better off.

Speaking from Paris, Keen said government housing schemes “drag people into the market who otherwise would not be able to get in" in an interview on the Keiser Report, a program on Russian English language news channel RT.

“What it does is increase the supply of buyers," said Keen.

“It’s a 'help to sell' not a 'help to buy' because those who are flogging their properties suddenly get a whole bunch of people with money in their pockets."

His comments were made in the wake of UK chancellor George Osborne’s heavily criticised ‘Help to Buy’ scheme, which provides state mortgage subsidies.

Keen said he agreed with the likes of the IMF and outgoing governor of the Bank of England, Mervyn King that Osborne's scheme is a bad idea.

Keen referred to the Australian experience of the government introducing first-home owner grants in an effort to bring more people into the housing market, which created housing bubbles each time such schemes were introduced, made housing more unaffordable and made buyers “worse off not better off”.

“When the Australian government doubled and trebled the scheme (through the first-home owner boost which ran from October 2008 to December 2009) house prices went up 8% and 12% per annum.

“[That is] 12% more unaffordable. If you can’t control it becomes a poisoned chalice."

Keen said governments sponsoring asset price bubbles to make themselves look like good economic managers was a “perennial theme” in Australia dating right back to when Bob Hawke came to power.

“One of the first schemes he introduced in the 1980s was a first home owners grant of a few thousand dollars, which started a little mini-bubble in housing

“After the 1987 stock market crash they did it again with a much larger amount of money that also started a huge bubble.

Prices rose 20% and 30% and then they fell 20% and 30% on the other side of it.

“In 2000 it was brought back and then doubled by John Howard in 2001. Eeach time they did it, it pumped up house prices even more.

“Housing grants have become part of furniture in Australia," he added.

By comparison, before the government began introducing these schemes, Keen says average house price increases were "one half of one percent" compared to consumer price increase over a year.

After the first scheme was introduced by Hawke, the average was 4% growth per year he said.

Keen also returned to his most controversial 2008 prediction about house prices falling 40%.

“House prices were falling when I made my call that they would fall 40% over 10 to 15 years.

“That’s when the government doubled and trebled the first-home owners scheme, which I renamed the first-home owners 'vendors' scheme.

“That restarted the bubble and they kept it going until mid-2010 when house prices started to fall again.”

“House prices fall much more slowly than the stock market. They don’t have the total crash.

“The biggest crash was in the US where house price did fall about 40% over four years.

“What I had in mind for Australia was the Japanese case of a slow bleed, where prices have fallen 70% over 20 years.”