In its final attempts to woo Australians to its favour this coming election, the Coalition government has announced a scheme that would dramatically change the game for first-home buyers intending to enter the housing market — Prime Minister Scott Morrison pledged $500m to support first-home buyers in their journey to homeownership by lowering the required deposit needed to take out a home loan.
“We want first home buyers to fulfill their dreams. Morrison explained how banks are cutting back on deposits and that 20% bigger deposits are now standard. It isn’t getting any easier.”
What does the initiative mean to buyers
First-time buyers who have less than 20% downpayment will be eligible to apply for a loan through First Home Loan Deposit Scheme. They will not be required to pay mortgage insurance (LMI) because the government will guarantee the loan.
The idea for this proposal was inspired in part by the Welcome Home Loan scheme in New Zealand. It was established in 2003.
The program will be launched by the government in January 2020. It will be available to single-homebuyers who earn at least $125,000 per year and to couples who earn as much as $200,000 per year.
This scheme’s beneficiaries will be eligible for support until their mortgage is refinanced, or for the entire life of the loan.
Darren Cooper from Urban Development Institute of Australia stated that the scheme would benefit many Australians who are struggling to get a home loan deposit.
This is a great initiative to help first-homebuyers who have made a deposit of at least 5%. The scheme will also guarantee the 20% remaining. It is a great step up for first-homebuyers, he said.
Cooper believes the timing of the scheme’s launch couldn’t be better, as house prices have increased faster that household incomes. For the 20% deposit, many Australians have saved for as long as 10 year.
He stated, “This is a great start and a really innovative way to leverage National Housing Finance and Investment Corporation in an effort to get more people into their first home faster.”
The Australian Labor Party accepted the Coalition’s proposal. They agreed to match it with a similar policy to ensure affordability.
“We back genuine support for first-home buyers — that’s why we are also reforming negative gearing for future purchases, so young Australians don’t have to keeping losing out to wealthy property speculators,” Shadow Treasurer Chris Bowen said in several reports.
Stockland’s chief executive Mark Steinert stated that the government’s plan was acceptable, in a report published in The Australian Financial Review. He stated that the plan could be a “total transformative” for first home buyers.
The current downturn is due to inability of finance. He stated that we support programs that help people achieve home ownership, especially since many first-time homebuyers struggle to save enough money for a deposit.
What’s the problem with this scheme, you ask?
Other market watchers were however less impressed. Terry Ryder, Hotspotting’s market watcher, stated in a Property Observer thought piece that the government would not address why there is an increase in affordability.
“But the First Home Loan Deposit Scheme will be available to only a limited number of first-home buyers and it fails to address the core issues – the price they will pay for properties and the associated costs of getting into the market,” he said.
The Coalition’s plan would help only 10,000 beneficiaries annually, translating to one in every 10 first-home buyers.
Brendan Coates, Grattan Institute Fellow, said that the new scheme would have minimal impact on home ownership and only slightly increase it.
“It might also push up prices – but by even less. People who are saving for their first home may be eligible to buy earlier. He stated that people who are priced out of market may be able to purchase a house for a bit more because they won’t need to pay mortgage insurance.
Coates said that first-time buyers don’t have the most difficulty getting the deposit required. However, lenders have very strict serviceability standards.
“Their problem lies in getting a loan. The banks assess their ability to repay the loan. He said that banks assume interest rates of 7.7 percent. This is higher than the average 4%.
Coates said that Morrison’s proposal was not the best. This is consistent with other initiatives such as the First Home Super Saver Scheme 2017 and Howard and Rudd’s first homeowner grants.
This scheme aims to reduce housing affordability by increasing housing demand. The new scheme is more affordable than the ones before it, so it’s less harmful. He stated that the new scheme has the same flaws as its predecessors. It pretends to make housing less expensive, but it doesn’t hurt anyone.
Coates stated, also, that increasing housing supply is necessary to address the affordability crisis.
“There are ways to make housing more affordable, but that involves prices being lower than they otherwise would be, which will affect homeowners today and will involve tackling contentious issues like density in our cities,” he said, “It’s a choice we have to make as a society — whether we want younger Australians to be able to live out the Australian dream.”
Realestate.com.au’s chief economic economist Nerida agreed with these sentiments. She indicated that an increase in supply would address affordability concerns.
“But again there will always be losers. She also said that regardless of what you do there will always still be losers. The gains are small compared to the cost of changing negative gearing.
Saul Eslake is a former economist from ANZ at University of Tasmania. He stated that this scheme could see some Australians owing much more money than their house’s value.
“It encourages people to take 95% loan–to-value ratio (LVR). According to The Age in a market with falling prices, it is possible for someone who joins the scheme to end up in negative equity.