The First Home Loan Deposit Scheme has received much attention. Economists have concerns about its effectiveness in helping first-home buyers to enter the market.

This $500m scheme allows 10,000 first-homebuyers the opportunity to bypass the deposit hurdle and purchase a property for as low as 5% deposit.

It will ultimately prove ineffective. Brendan Coates, Grattan Institute’s director, stated in a television interview there are only 10,000 annual guarantees. This is in comparison to the housing affordability problems faced by younger, less-affluent Australians.

While Coates said limiting the scheme to a certain number of beneficiaries would not make a difference, he said expanding it would be “counter-productive”.

“We have seen that these schemes have pushed up the prices at the bottom of states’ budgets,” he said. He stated that first-time buyers will now need to compete for limited homes.

The guidelines for this scheme were published by the government in recent weeks, along with the price caps per state.

Restrictive eligibility requirements

Daniel Ziffer, market watcher, believes the scheme’s acceptance of applicants on a First-Come basis and eligibility requirements could prove to be problematic.

Ziffer stated that only people who have a contract in place will be eligible to take advantage of the scheme once it becomes effective on January 1, 2012.

“There are about 110,000 first-time buyers each year. That’s 11 times more than the available homes. A single person should make no more than $125,000, while a couple should not earn more than $200,000 per year. He stated that only 10% of Australians earn more than this.

Ziffer also said that price caps in capital cities are not as restrictive and as flexible as the median home worth.

“No property exceeding $700,000. in Sydney, Newcastle, Lake Macquarie or the Illawarra.” You will be eligible. You cannot live in Melbourne or Geelong if your property is worth more than $600,000. He stated that it is impossible to live in Melbourne and Geelong with a property worth more than $600,000.

David Llewellyn Smith said in a Macrobusiness Article that the scheme would not reduce affordability or cause high-end price increases.

“A new wave of subprime government-sponsored first-home buyers floods into property market with only five percent deposits would not make sense in the best times.” It’s a negative equity disaster,” said he.

There are upsides to the plan

Michael Sukkar, Housing Minister stated that the government will continue to monitor the demand for this scheme to be developed further.

“We don’t add any layers to bureaucracy. These are the guarantees banks can offer to their customers. He said that banks would conduct credit checks and apply the same lending criteria to all customers as any other bank.” He made this statement at a press conference.

Ken Morrison, chief executive of Property Council of Australia stated that the scheme will be a tremendous help to first-homebuyers and will play a critical role in helping to improve declining construction levels.

He said that it was crucial to ensure the success of the scheme for first-home buyers as well as the wider housing market.