The Coalition has promised to help 10,000 first home buyers into the market by topping up their 5% deposits with a government guarantee for 15% of the loan.
Scott Morrison insists the policy is not “free money” but experts have already warned it could be ineffective at lifting homeownership rates or counterproductive by bidding up prices.
Labor has already committed to match it so we’d best get across the policy which will be introduced in some form whoever wins the election.
Who gets it?
Single people earning up to $125,000 or couples earning up to $200,000 will be eligible for the first-home loan deposit scheme if they have saved 5% of the value of the home.
The government will set aside $500m of equity through the National Housing Finance and Investment Corporation to guarantee loans up to a value of 20% of the home. Buyers won’t need to have a full 20% deposit and will save around $10,000 by not having to pay lenders mortgage insurance.
The scheme is limited to 10,000 first homebuyers, roughly one-in-10 of the 110,000 Australians who bought their first home in 2018.
The government has suggested there will be regional caps on the value of homes for which it will guarantee a deposit.
How long does the guarantee last?
Once the first homebuyer has borrowed 95% of the value of the house, the government guarantee lasts until the homeowner refinances.
Is it risky for the government?
Scott Morrison told the Liberal party launch on Sunday the policy is not “free money” and lenders “will still do all the normal checks on the borrowers to make sure they can meet their repayments”.
Grattan Institute housing expert Brendan Coates told Guardian Australia in the event of a default the bank would need to get its money before the government otherwise “they can’t treat it as a government-guaranteed deposit”.
Coates suggested the government is “opening itself up to quite a lot of risk, especially in a falling market”.
Morrison anticipated this objection by arguing that owners refinance “when the equity increases – which it would under a Liberal-National government” – which is brave because house prices are already falling and are expected to fall further in Sydney and Melbourne.
Will it work?
If the measure is more first home buyers entering the market, Coates said the policy is “either going to be ineffective or counterproductive”.
If the guarantee does induce people who wouldn’t otherwise be able to afford a home to enter the market, then “it will impact prices”, Coates said. “Then it starts to look more like first home buyers grant, it bids up prices and the vendors win.”
Morrison said the policy will “make a big difference, cutting the time taken to save for a deposit by at least half and more”.
If the aim is to cut the time to put together a deposit, it may be a success. RateCity, an interest rate comparison site, has calculated the scheme could slash the time taken to save for a deposit by more than five years for people living in Sydney, four years in Melbourne and three years in Brisbane.
But RateCity research director Sally Tindall said a 30-year mortgage with a “wafer-thin deposit” is a recipe to pay “thousands more in interest to the bank over the life of the loan”.
According to RateCity’s calculations, buying a $500,000 property with a 5% deposit instead of 20% will cost an extra $58,774 over the life of a 30-year loan.
“Apra [Australian Prudential Regulation Authority] has spent the last four years telling the banks to be cautious of lending to Australians with low deposits,” Tindall said. “Now the major political parties are actively encouraging it.”
What are the politics?
Before the 2016 election Labor proposed tax changes to tip the balance of the housing market away from investors and towards first home buyers.
The Coalition ruled out following Labor’s proposal to phase out negative gearing for existing properties and to halve the capital gains tax discount. It argued that Labor’s policy will cause rents to rise and house prices to fall, despite the treasury advising the price impact will be “relatively modest”.
While opposing Labor’s plan gave the Coalition a potent attack line, it left a gap in its own offering – it needed something to say about housing affordability.
Since then the Coalition has been in search of policies to help first homebuyers without hitting house prices, such as allowing more first home buyers to use the tax benefits of superannuation to save for a deposit. Just 2,800 people so far have used that scheme so now the Coalition is trying to find another way to help people with enough income to afford repayments but not enough savings to get a foot on the property ladder.
Coates said the first-home loan deposit scheme shows the Coalition’s “real challenge” is that it “wants to help first homebuyers without hurting anyone”. “The reality is first home buyers can only win if someone else loses.”
Coates said Labor’s negative gearing policy “won’t hurt prices but it will help first home buyers because more investors will sit on the sideline”.
“The Coalition is still trying to signal it’s on the side of first homebuyers without wanting home prices to fall.”
The first-home loan deposit scheme is likely to be popular with people on the cusp of buying their first home.
But the fundamentals of borrowing are unchanged: smaller deposits mean bigger interest payments over time.
In comparison with tax changes that remove investors’ advantages, the Coalition’s policy appears to be tinkering around the edges.