Rising inflation – and rates – force the government to alter course

Rising inflation has already forced the new Rudd government to “strengthen” one of its pre-election promises.

On the eve of another expected rate rise, the Treasurer, Wayne Swan and Housing Minister Tanya Plibersek, announced that cabinet had approved Labor’s promised First Home Saver Accounts.

And those accounts will be more generous than previously signalled.

The two ministers said, they will allow a couple on average weekly earnings, who are saving for their first home, by putting aside 10 per cent of their incomes, to accumulate a deposit of more than $85,00, in just 5 years.

Like the previous government’s first home owners’ grant, this is essentially a stop gap political measure, that could easily be overwhelmed by market forces.

That is, if house prices keep rising rapidly.

And there has been little sign, so far, of any easing.

In fact, figures released by the Australian Bureau of Statistics, just yesterday, show that the price of established homes, in most Australian capitals, are accelerating.

They rose by a hefty average of 12.3 per cent last year. That’s up from 10.6 per cent in the 12 months to the end of September.

Details of the new savings scheme are still being worked out.

Mr Swan said there would be a consultation paper, later this week, spelling them out.

He said, though, that the “improvements” would include:-

• Boosting assistance for low income earners through the provision of a minimum 15 per cent government contribution on after tax contributions of up to $5,000 and
• Delivering a streamlined up-front government contribution directly into accounts, rather than through a more complex system of salary sacrificing.

Predictably, the building industry has welcomed the plan.

Ron Silberberg, of the Housing Industry Association, said his body had first raised the concept of a first home owner super saver to help first home buyers raise a deposit and to reduce the current, risky reliance on 100 per cent plus loans.

The figures below, taken from the government’s announcement, show the government contribution levels proposed under the new scheme, which is expected to cost some $850 million over its first four years.

For more, see www.treasurer.gov.au