A national scheme that would see the government co-purchase property with a first-home buyer could solve Australia’s declining homeownership rate.
Brendan Coates (Grattan Institute economist policy chief) suggested that a national Equity Scheme could allow younger buyers to enter the housing market quicker.
“A national shared equity scheme would help level the playing field for first home buyers and arrest the decline in home ownership among poorer Australians of all ages,” Mr Coates said.
What is the purpose of a national equity programme?
Under Mr Coates’ proposal, first-home buyers would apply for the scheme that would essentially let the National Housing Finance and Investment Corporation (NHFIC) co-purchase up to 30% of the homes value.
If they don’t have a minimum deposit of 5%, first-home buyers will need funds borrowed from a private lender.
The government will receive the proceeds of any sale if the buyer decides not to buy the house.
A buyer could also purchase the government’s stake in increments up to 5% at current market prices.
“Consistent with longstanding state schemes, the NHFIC would not charge rent or interest to participants,” Mr Coates said.
“However, purchasers would be required to cover all costs associated with buying or selling a home, such as conveyancing and stamp duty, as well as ongoing costs such as council rates and maintenance.”
What are the most important requirements for a national equity program?
Mr. Coates said that the scheme should be off to a great start, with 5,000-per year trial slots in the first three years.
“Existing state schemes are typically small, and often limited to public housing tenants or to purchasing homes solely from government-run developers,” he said.
Only individuals who buy their primary residence would be eligible for the proposed scheme.
An income threshold should also be set — below $60,000 for single homebuyers and a combined income of below $90,000 for couples.
Also, a regional price cap would be in effect to limit participants from buying homes that are less than the median price for their area or city.
The Victorian Homebuyer Fund was launched in Victoria late last year. Victoria can take on up to 25% of a home loan’s cost and exchange it for equal equity.
A national equity program might be able to increase house prices.
Mr Coates claims that the scheme could cause higher house prices as a result of increased demand.
This scheme is targeted at low-income Australians so the impact is less.
“Capping the scheme at 5,000 places a year in the early years would limit any short-term impacts,” Mr Coates said.
“But even if the scheme were to eventually offer 10,000 shared equity loans a year, with each buyer purchasing a $500,000 home on average, the scheme would add at most $40bn to housing demand in a $9tn housing market, and probably a lot less.”
This scheme would be a good fit for the federal government.
The scheme will be expensive for the federal government in the short-term as it has to pay interest on additional government debt.
However, Mr Coates believes that a national shared equity scheme would likely be “budget positive” in the long run, especially if nominal house prices rise faster than the interest rate on government debt to finance the purchases.
An example of this is Western Australia’s Keystart scheme, which has churned in profits for the state.
“Helping lower-income borrowers to enter the housing market, with as little as a 5 per cent deposit, could result in more bad debts in future — but existing shared equity schemes report low rates of non-performing loans, even when house prices have fallen,” Mr Coates said.
“Even if the federal and state governments make the hard choices to improve housing affordability by lifting supply and reducing demand, house prices are likely to remain much higher, relative to incomes, than they have been over most of Australia’s history.
“Falling home ownership is a big problem for Australia — a national shared equity scheme would help keep the dream of home ownership alive for many Australians.”