With the Coalition returned to Government in last month’s election, commentators are taking a closer look at the First Home Buyer Deposit Scheme, which was launched late in the election campaign. The policy has few supporters.
Scheduled to start next year, the scheme means that first home buyers will only need a 5 per cent deposit for their mortgage. The Government will make up the rest with a guarantee. It will invest $500 million in the National Housing Finance and Investment Corporation to back the guarantees
The scheme will be available to 10,000 people a year. Support will be available for people with income up to $125,000 ($200,000) for a couple. There will be a maximum loan size, depending on the market where the property is being purchased.
Its benefits are that will lower the amount of deposit required and save the cost of lenders mortgage insurance in many cases.
The big criticism of the scheme is that will add to the interest cost of buying a home. In a recent client newsletter law firm Coleman Greig provided the following scenarios:
- A couple buys a unit for $500,000 with a 20 per cent deposit. This means they need to borrow $400,000. Assuming monthly interest of just under $2000, the interest cost over a 30 year loan life would be a little over $300,000.
- Another couple uses a deposit of $25,000 and the Government guarantee to buy a $500,000 unit. They need a loan of $475,000. The interest cost would be more than $300 a month and about $60,000 over a 30-year loan life.
Another criticism is that helping 10,000 people a year will not achieve much. Cameron Kusher, CoreLogic research analyst, says that over the past 10 years there has been an average of 103,485 first home buyer finance commitments each year.
So, only about 10 per cent of first home buyers will be able to use the scheme in any year.
The borrower will need to pass normal credit checks. Over the past few years it has become increasingly difficult to get a mortgage.
Kusher says the scheme is not going to make any difference to anyone who can’t get a mortgage currently. Given that borrowers still need to pass usual credit checks, the only people who will have access to the scheme are those that could already purchase anyway.
Kusher says: “From a housing affordability perspective, it is difficult to see how this policy actually helps.
“If anything, it might increase demand from first home buyers and lead to higher prices within the price points that fit with maximum loan sizes.
“Some more strategic alternatives to improve housing affordability can be found on the supply side, such as allowing for higher density in high demand areas, improving accessibility to affordable housing markets via infrastructure upgrades and re-thinking inefficient tax, such as stamp duty.”
Anthony Doyle, Fidelity International’s global cross asset investment specialist says that in 2013 the UK Government brought in a similar ‘help to buy’ scheme.
Doyle says: “The big problem with the policies of this type is that they really fuel demand but don’t really address supply.
“The conclusion from that is that it wasn’t a ‘help to buy’ scheme, it was a help to sell scheme.”
If you are an existing owner of an apartment worth $400,000 to $500,000, all of a sudden you have a whole swathe of first home buyers that have access to credit which they didn’t have access to before this policy was implemented. They buy your apartment for $400,000, you’ve got that in your back pocket you go and buy a mid-sized house and so on and so forth.
It caused house prices in the UK, and in particular London, to really spike but didn’t address housing affordability. It does the exact opposite, it causes prices to increase. It doesn’t address the supply constraints on housing so one analyst Albert Edwards, from Société Générale called it ‘moronic’, what the UK had implemented.
I’m not going to go as far as that but it is not going to address any of the issues around housing affordability but it will produce potentially some stabilisation in house prices. The good thing is that it is limited to 10,000 people while in the UK it was unlimited.
They have now stopped that sort of scheme but if you really want to ramp up consumption, ramp up your housing market because that’s obviously the household’s biggest asset and that really drives consumption going forward.