The Government’s first home loan deposit scheme is risky for first home buyers and unlikely to boost home ownership, some economists say.
- For up to 10,000 people, the Government will guarantee the additional amount needed to reach a deposit of 20 per cent
- Those first home buyers will be exempt from having to pay Lenders Mortgage Insurance
- Available for singles earning less than $125,000 a year or couples earning a combined income of less than $200,000
One of the policies the Coalition took to the election was a scheme to lower the amount first home buyers need to save to buy a property.
Announcing the policy, Prime Minister Scott Morrison said it which would enable first home buyers to access the market with a deposit of only five per cent.
The Grattan Institute’s Brendan Coates said the scheme did not guarantee first home buyers entry into the property market.
“The reality is we can only help first home buyers if someone loses, which means prices probably have to fall,” he said.
“The reality is quite a lot of those people will never get access to this scheme because they may struggle to ever be able to afford a loan based on bank regulations around how much you’ve got to be able to repay,” Mr Coates added.
He estimated about 127,000 Australians would be eligible for the scheme and already had a five per cent deposit.
The scheme is currently capped at 10,000 borrowers, approximately 10 per cent of the Australians who bought their first home last year, meaning not everyone eligible for the scheme will reap the benefits of it.
“It means the policy’s … going to be fairly irrelevant, it’s not going to do a lot to boost home ownership,” he said.
Mr Coates said broadening the scheme and increasing the number of people who could access it would not necessarily help.
“If the scheme was uncapped, it would simply lead to more demand, which would push up prices, which would hurt first home buyers rather than helping them,” Mr Coates said.
Despite house prices falling in many capital cities, Mr Coates said it was increasingly difficult for first home buyers to save for a deposit.
“The deposit’s arguably the biggest hurdle to buying a house in Australia,” he said.
“It used to take something like five or six years for the average person on the average income to buy the average house, to save a 20 per cent deposit to buy that house. Now it’s taking something more like 10 years.”
Charlotte Stacey and Austin Pond are living with Austin’s parents while saving for their first home (ABC News)
For Charlotte Stacey and Austin Pond, the Coalition’s announcement could not have come sooner.
“It starts opening doors — maybe in a year or so we’ll be living in a house, as opposed to five years. It does open the door up,” Mr Pond said.
The couple are living with Mr Pond’s parents so they can save for a house deposit faster.
“We’re probably around the 10 per cent mark, maybe 11 or 12, depending on the house price,” Mr Pond said.
“It’s been a pretty hard slog, we’ve been saving pretty well. We haven’t been going out and going on holidays or anything.”
The couple are looking for a property close to Hobart worth about $300,000. Without the Government’s policy, they would need a $60,000 deposit to avoid lender’s mortgage insurance (LMI).
Under the new scheme however, they would need a quarter of their initial target, just $15,000.
The added risk of buying in a slowing market
JP Morgan chief economist Sally Auld said encouraging first home buyers to enter the market in a period of uncertainty could mean some of them might end up owing more than their property is worth — something known as negative equity.
“In a market where at the moment house prices are still continuing to fall and the sort of one to two-year outlook is reasonably uncertain, I’m not sure that encouraging a cohort of buyers without an established credit history to take out loans at a high loan-to-value (LVR) is sort of hugely sensible.”
“I mean, the point with this is that the money ultimately has to be paid back,” Ms Auld said.
And if they defaulted, the taxpayer would foot the bill.
She also echoed concerns about expanding the scheme.
“I think the risk of these sorts of policies is that we look back in five years’ time and something that started off quite small and for only 10,000 people suddenly turns into, you know, something much bigger and much more potentially costly for the Government,” Ms Auld said.
Getting approved for loans may be about to become easier, with the banking regulator proposing loosening lending requirements for banks.
APRA has indicated it may be open to lowering the minimum interest rate serviceability.
For the past several years, APRA has required banks to test prospective borrowers against the higher of either a 7 per cent interest rate, or a 2 per cent “buffer” over the loan’s interest rate.
Speaking from Brisbane, Reserve Bank Governor Philip Lowe said it would not promote the economy as much as lower interest rates.
“If APRA does in fact remove this floor, some people will be able to borrow more and some will take advantage of that and that will help, but that is not a substitute for lower interest rates,” he said.
First home buyers ‘a popular target’ for politicians
This is not the first election where first home buyers have been singled out.
For more than 100 years, Australia has been creating housing policy designed to help people get their foot on the property ladder.
Ms Auld said buying your own home had been “ingrained into the Australian culture”.
“It sort of appeals to this notion of fairness and I guess plays into maybe the Australian psyche, where it’s almost like a ritual of coming of age that at some stage you buy your own home,” she said.
I guess people sort of see that as a way to securing economic success and prosperity later in life. And so I think for those reasons, first home buyers are always a sort of popular demographic or target group for politicians.”
As early as 1918, the government was helping ex-service personnel get into the market with low-interest loans.
In the 1960s, the Menzies government started paying grants to young first home owners, and the following decade Gough Whitlam replaced the grant with income tax deductions for mortgage interest payments.
In 1976, Malcolm Fraser reintroduced and boosted the home deposit assistance grant. In 1983, Bob Hawke replaced it with an even bigger grant before scrapping it in 1990.
Ten years later, it was reintroduced by John Howard, and in 2008 it was temporarily boosted by the Rudd government during the global financial crisis.
And in 2017, the Coalition government introduced a scheme to allow first home buyers to save for a deposit within their superannuation fund.
Mr Coates said none of those policies were as effective as bringing down house prices.
“It’s endemic in Australian housing policy over the past three decades that we’ve done the things that sound good but won’t work, rather than facing what are much more politically difficult choices to boost supply by changing planning rules or to change the tax system.
“That would make housing more affordable in the long run but they’re much more politically contentious in the short term.”
“Until we pick up some of those policies and tell the Australian people squarely that’s what it’s going to take to improve home ownership in Australia, we’re likely to keep going backwards,” Brendan Coates.
Watch the story on 7.30