While the federal government’s expansion of the Home Guarantee Scheme might help boost homeownership rates, it is not without any drawbacks in terms of Australian’s personal finances and the wider housing market.

CoreLogic’s head for research Eliza Owen is trying to decide if the scheme is worth it. The higher interest rates for homebuyers is one of the most concerning aspects.

“With the cash rate likely to rise sometime in the next 12 months, this will exacerbate interest between those on a 5% and 20% deposit loan,” she said.

“Understanding interest is extremely important when taking on large mortgages, especially when targeting these schemes to younger Australians and women, where rates of financial literacy among these groups tend to be lower.”

It is important to consider the difference between the interest costs on a mortgage deposit of 5% and the cost of not living in a housing market.

Ms Owen believes that the scheme can help potential homebuyers get on the market quicker, as it reduces the time needed to save a deposit by around a quarter.

It would take 2.3 years to save 5% based on the $728.034 median house price in February 2022. This compares to 8.8% years to save 20%.

“This could cut 6.5 years in the rental market, which at current weekly rent values on the median dwelling in Australia, equates to almost $160,000,” she said.

This scheme allows buyers to save over $30,000 on lenders mortgage insurance.

Are the price limits reasonable?

Ms Owen indicated that the scheme is eligible for approximately 35% Australian dwellings, based upon current property prices.

Prices falling means that potential applicants will have greater access to homes.

However, Australia’s diverse housing market means the stock availability varies widely by region.

“CoreLogic’s analysis shows the proportion of qualifying properties ranged from up to 66.3% of dwellings in Perth, to just 10.7% in the ACT,” Owen said.

Ms Owen stated that it was important to review the price caps on a regular basis to adjust them to reflect changes in the market.

Is it excessive to establish income thresholds

Grattan Institute reports Australia’s homeownership rates have fallen to 66%, from 71% back in 1995 and 71% by 2016.

“This means addressing low rates of home ownership should target lower income households,” Ms Owen said.

However, the income thresholds for the First Home Loan Deposit Scheme are relatively high — $125,000 p.a. Single applicants: $200,000 an year. For couples.

ABS Household Income data and wealth data showed that households with an annual household income of $200,000 were among the top 20 percent of income. The median household income was closer at $88,000.

“Couples earning up to $200,000 can qualify for the FHLDS, though figures would suggest their risk of missing out on home ownership without it is lower,” Ms Owen said.

According to the National Housing Finance and Investment Corporation (NHFIC), the highest concentrations of guarantees were found below income thresholds for 2019-20. These range from $60,000 to $80,000 for singles, and $100,000 to $1225,000 to accommodate couples.

“The purchase price caps may also have a self-selecting effect, with those on higher incomes seeking more expensive homes,” Ms Owen said.

The refining of income and price levels are the main limitations to expanding the guarantee scheme, but not the major default risk for first home buyers.

Ms Owen stated that negative equity is not a risk due to the long-term holding period for owners-occupiers and strong labour force.

“An objective of housing policy should also focus on more equitable housing outcomes across income brackets, including adequate provision of affordable housing for those who are unlikely to achieve home ownership,” Ms Owen said.

Does the expansion increase housing demand?

Ms Owen indicated that the expansion of the scheme could have either a positive or inverse effect. She mentioned the possibility of an increase in housing demand.

Prior to the announcement of targeted grants for first-home buyers, demand increased.

“The temporary boost to the First Home Owner Grant increased housing activity around the time of the global financial crisis in 2008, when a lift in real estate transactions positively impacted the economy,” Ms Owen said.

“Expanding the FHLDS could increase first homebuyer numbers at a time when the housing market outlook is uncertain — alternatively, this could increase demand for more affordable properties, increasing prices in this segment.”