A raft of conditions means that the new first home buyers scheme will not help low income earners into the market, economists argue. (ABC News: Stephen Letts)
A $500-million scheme will help 10,000 first-home buyers get into the market with a smaller deposit than they would otherwise need.
- Economists argue the new First Home Loan Deposit Scheme is "drop in the ocean" and unlikely to help many first home buyers
- The scheme allows 10,000 first buyers to secure a loan with a deposit of just 5 per cent
- It also restricts where and what first home buyers can buy
Prime Minister Scott Morrison promised before the election it would be people's "first leg on the first rung of the ladder".
Then, housing and economic experts were dubious. Now, with more detail released, they're fairly certain: it won't work.
"Ultimately, it's going to be pretty ineffective," Brendan Coates, household finances program director at thinktank the Grattan Institute, told The Business.
"It's only 10,000 [loan] guarantees a year, so that's a drop in the ocean really, compared to the problems of housing affordability for younger, poorer Australians," he said.
Lenders generally insist on 20 per cent and charge what is called 'lender's mortgage insurance' to cover the risk of buyers who have smaller deposits.
Under the scheme, taxpayers will underwrite the 'gap' by paying the lender's mortgage insurance.
"It's essentially a lottery for those that do get access to this scheme," Mr Coates added.
"Because it allows them to borrow more without having to pay lenders mortgage insurance — saving them up to $10,000 — so it's likely to be much more demand for the scheme than the 10,000 places that are available."
But the 'catches' of the scheme keep racking up.
- There are around 110,000 first home buyers in the market each year: 11 times the places available. The grants will begin 1 January 2020 on a "first come, first served" basis, preferencing those who have a deal ready to go and are skilled in form-filling.
- You must earn less than $125,000 a year for singles, or $200,000 a year for couples. Only about one in 10 people in Australia earn more than that, so it's not exactly targeted at poorer people.
- You still have to pay back the loan as normal, but it's bigger. The scheme could see you put down a deposit of $35,000 for a $700,000 property in Sydney. This means your mortgage would be for 95 per cent of the purchase price, or $665,000.
- 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.
"My over-riding fear is that this is a band-aid, for a very big problem we have with housing affordability," Nicki Hutley, from Deloitte Access Economics, said.
One of Australia's foremost economists, Ms Hutley said schemes like this have worked in some instances, such as the Indigenous community, but they can put people into dire situations.
"It's a big risk to taxpayers and this is why lender's mortgage insurance exists for standard mortgages, and it's also why most of the banks require a 20 per cent deposit," she said.
But the larger issue is the scheme essentially blesses 95 per cent home loans for people on lower incomes, and lender's mortgage insurance protects the bank — not the home owner
Regulators have recently loosened the 'stress test' that checked how well people could service loans if rates rose, to get credit flowing.
That change, coupled with this scheme and low interest rates, could build huge loans that create problems for stretched borrowers. Australia has always been careful in this field, she added, for solid reasons.
"That prudence that we've had has held us in good stead. We don't want to do anything that undermines that strength that we have in our banking system — from both a macro perspective for the economy as a whole, but also to protect individuals," she said.
Less than median house prices
The scheme 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.
A price cap exists for the different areas, particularly capitals and large regional centres where more than 250,000 people live.
No property in Sydney, Newcastle, Lake Macquarie or the Illawarra (Wollongong) over $700,000 will qualify. Nothing in Melbourne or Geelong over $600,000 fits either.
If you want to live in Brisbane, the Gold Coast or the Sunshine Coast a $475,000 limit applies.
Scheme's property price caps:
|State/territory||Capital city and regional centres||Rest of state|
"This is a small scheme that will not really counteract the inflationary impact of what they're doing in tax policy," Kate Colvin, spokesperson for affordable housing lobby group Everybody's Home, said.
The key tax policies in question are negative gearing and capital gains concessions.
Negative gearing occurs when landlords make less money from rent than they spend on the property (such as paying the mortgage). This reduces their taxable income (by billions).
A capital gain occurs when a person makes a profit by selling an asset like shares or a property.
Since 1999, 50 per cent of the capital gain on most assets held by someone for more than a year is not subject to capital gains tax. Because that's a lower rate than is levied on wages or interest, it's been criticised as overly generous.
According to Treasury data, the lost revenue has risen quickly, from $6.3 billion in 2014-15 to an expected $9.4 billion in 2018-19.
"The Federal Government puts $12 billion in the pockets of investors for negative gearing and capital gains tax exemptions each year, and that means investors can outbid home buyers at auctions," Ms Colvin said.
"This scheme will make it a little it easier for homebuyers to bring forward a purchase if they've already saved for a deposit, but the real problem that they face as the cost of the home that they're buying".
Despite recent falls, Australia's housing remains some of the most unaffordable in the world.
In a statement, Treasurer Josh Frydenberg said the First Home Loan Deposit Scheme added to initiatives that allow first home buyers to build their deposit through voluntary contributions to their super fund, and the release of Commonwealth land for development.
Mr Coates said limiting the scheme to just 10,000 applications means it won't make a difference. But expanding it could be counter-productive.
"We know from experience when states have implemented these kind of schemes before, that they've really pushed up prices at the bottom end. So first-time buyers are competing for a limited number of homes," he said.
"This scheme has a certain seductive appeal. It sounds like it's going to help first-home buyers … when really it's not going to make much difference".