There are 110,000 first home buyers in the market each year – 11 times the places available.
The Liberal-National Government have released the details on how its First Home Loan Deposit Scheme (the Scheme) works.
The Scheme provides a guarantee that is said to allow eligible first home buyers on lower and middle incomes to purchase a home with a deposit of as little as 5 per cent. The Scheme is limited to guaranteeing 10,000 loans nationally each financial year, promising to help first homebuyers into the market by topping up their 5% deposits with a government guarantee for 15% of the loan, starting from 1 January 2020.
The scheme is not exactly targeted at low-income households
Applicants will be subject to eligibility criteria – being a first-home buyer and having taxable incomes up to $125,000 per annum for singles and up to $200,000 per annum for couples. Only about 1 in 10 first home buyers in Australia earn more than that, so it’s not exactly targeted at low-income households as it claims. If Government’s are going to implement initiatives such as this, it at least must be targeted to incomes under $75,000 per annum, with strategies in place to manage any risk to the homebuyer.
The government will set aside $500m of equity through the National Housing Finance and Investment Corporation (NHFIC) to guarantee loans up to a value of 20% of the home. Buyers won’t need to have a full 20% deposit and will save around $10,000 by not having to pay lenders mortgage insurance. It will apply to owner-occupied loans on a principal and interest basis. There is no requirement for it to be an existing or new property.
Property price caps apply
The scheme sets out the core elements of NHFIC’s housing research function, including the property price caps. In Western Australia for eligible homebuyers in Perth the price is capped at $400,000. Regionally the cap is $300,000. The price caps are based on median house prices per state as well as existing stamp duty exemptions.
At present, the price ‘caps’ for properties you can buy under the scheme don’t go near the median house prices in the major capital cities, where most people live and work. A price cap exists for the different areas, particularly capitals and large regional centres where more than 250,000 people live.
The scheme has been described by many leading housing and economic experts as a ‘drop in the ocean’ and a ‘band-aid’. Shelter WA CEO Michelle Mackenzie said while the Scheme will be helpful for some, it does not come close to solving the housing affordability crisis.
The real problem is the cost of homes they’re buying
“This scheme won’t help reduce homelessness, it won’t build more social housing, and it won’t deliver more affordable rentals. What Australia desperately needs is a national housing strategy so that policies such as this sit within a coherent strategy that will deliver affordable housing outcomes for all.”
Given the limited number of loan guarantees this policy will likely not affect home ownership rates, at best it will bring forward home purchases of a very small amount of people who have already saved a deposit and can afford to purchase that home soon regardless. The real problem that they face is the cost of the home that they’re buying.
The 10,000 cap on loans also hinders the scheme as there will be much more demand than is allocated for such loans. There are 110,000 first home buyers in the market each year – 11 times the places available.
So, it will help a very small percentage of people seeking affordable housing and seems tailor-made for people struggling to scrape together the large deposit needed to enter the market. But it severely restricts where and what they can buy. It could be ineffective at lifting home ownership rates or counterproductive by bidding up prices.
In the event of a default on the loan, the bank would need to get its money before the government otherwise it cannot be treated as a government-guaranteed deposit. It has been argued that the government is opening itself up to risk, especially in a falling house price market.
There might be some merit in this idea if it became a national shared equity scheme, but unfortunately it risks enticing heavier borrowing by first home entrants, which could leave them overcapitalised and in negative equity if prices continue to subdue as desired, potentially defaulting on the loan.
Reducing negative gearing would be productive
More productive decisions by Government could be to abolish negative gearing and reduce capital gains tax so that first homebuyers get a more even playing field against multiple home investors. On top of this, the Government must develop a national strategy to increase affordable and social housing supply.
Applications for the scheme are not yet open. The scheme will be administered by NHFIC.
Further detail can be found here.