Recent housing figures in Victoria suggest that something of a property boom is occurring amongst first homebuyers. Rather than their numbers shrinking, as would normally be expected during the nervous early period of a recession, first homebuyers appear to be turning up to opens-for-inspection and auctions in ever increasing numbers.

Both state and federal political leaders have been quick to jump on this data as evidence of success for the first homebuyer's grant, and on the face of it, this claim may well be true. After all, with grants totalling $28,000 (state and federal added together) on offer, what prospective buyer wouldn't be tempted to enter the property market?

There is, however, several looming problems with this type of stimulus for entry level residential properties. First up, the mounting pressure on government budgets mean that allocations for the grant will almost certainly be cut further. One only has to look at the recent demise of the solar electricity rebate for evidence of this. Perversely, suspicion that the first homebuyer's grant may not last forever could engender a last minute frenzy in the housing market.

A second issue is that although Australia appears thus far to have dodged a bullet with respect to unemployment, the consensus opinion among economists is that jobless numbers will most likely rise substantially over the next 12 to 18 months. In previous recessions rising unemployment hit younger and older workers hardest – and it is this former group taking advantage of the first homebuyer's grant to gear up and buy a house they might not otherwise be able to afford.

Finally, as I've written in this column previously, the unprecedented level of government borrowing currently taking place around the world will almost certainly raise interest rates well above the historically low levels presently on offer. First homebuyers often have an unfortunate tendency to be overly optimistic about homeloans, ie they assume that cheap servicing costs will remain in place for the forseeable future when it's often likely that they won't.
Low unemployment, very cheap interest rates and overly generous government grants have combined to provide too much stimulus for first homebuyers.

Let's hope a recent return to conservative lending policies by the banks limits any damage this bulge in the entry level housing market might cause.