Home buyer help is turning out to be a big hinderance
The Federal Government needs to rethink its home buyer help programs, and quickly. They were launched in a market where the supply of homes was already way behind demand, and in any case, they’re setting up some of our nation’s most vulnerable people for challenging, prolonged, and potentially dangerous financial commitments.
What’s more, this approach by the government to Australia’s convoluted housing problem is hindering an already rickety economy.
In the past month or so the media have been having one field day after another, headlining their second guessing of how the Reserve Bank of Australia (RBA) will react to inflation that at 3.8%, continues beyond its preferred range of 2% to 3%.
But the fact that housing, as the greatest contributor to the rise of inflation, has increased its contribution by 5.9% in the past 11 months, doesn’t appear to have raised too many people’s levels of concern.
It's been the 3.2% rise in contributions from the two sectors of food and non-alcoholic beverages, and recreation and culture, that seem to have provoked most criticism.
The problem’s back story
Initially the government’s Home Guarantee Scheme enabled first-home buyers’ entry to the property market using a 5% deposit (2% if the buyer was a single parent), and this allowed people who previously had no chance of paying the 20% deposit required by most lenders, to become homeowners.
But in October the Scheme was questionably updated. With help from state-based first-homebuyer stamp duty exemption, the cash deposit required to buy a home was already considered by finance experts to be frighteningly low.
In Sydney, the nation’s most expensive property market, it had been possible for a single parent, by combining the federal family home guarantee with the NSW-based first home buyer assistance scheme, to buy a house costing $800,000 with a deposit of only $16,000.
The updated federal scheme retains the 2% deposit for single parents, and other first-home buyers with 5% deposit will no longer be restricted by caps on places available under the scheme.
These have been removed and the maximum price that can be paid for a house under the scheme has been increased from $900,000 to $1.5m. With current income caps of $125,000 for singles and $200,000 for couples also being removed, it’s hardly surprising there are ever-lengthening queues of applicants for places in the updated Home Guarantee Scheme.
But why has it been made so easy and attractive for so many people to enter the housing market when the unmet demand for homes is already so high?
It’s unquestioned by most people that home loan grants will inevitably increase prices, but sceptics who doubt the government with its housing schemes is hurting the very sector it says it wants to help, should note the prudential regulator has had to intervene by imposing new lending limits on banks.
The Help to Buy Scheme
Although prices for first-home buyers are rising faster than the rest of the market, the government nonetheless seems resolved to press ahead with its latest Help to Buy Scheme. At least it seems less risky than the earlier Home Guarantee Scheme, a universal scheme based on 5% deposit.
The new scheme also puts less pressure on housing demand with an annual cap of 10,000 places which is lower than the 5% Home Guarantee Scheme.
The government’s offer to share up to 40% of equity in the home of a participant in the new Help to Buy Scheme is interesting. While it lessens likelihood of vulnerable people being trapped in mortgages some observers say are reminiscent of the subprime mortgages that triggered the GFC, it may also yield another benefit.
The number of people who would not want the government involved in the equity of their homes in any circumstances could perhaps be high enough to curb to some extent the demand for housing.
However, unfortunately the Home Guarantee Scheme has had many more takers than the Help to Buy Scheme. This is primarily because it was announced after the planned update of the original Home Guarantee Scheme to which most people wanting first-home buying assistance were by then committed.
Erosion of a well-tried system
Time has validated a well-tried system where banks required 20% deposit on a home loan. The system has provided a measure of protection for the banks against the possibility of a property having to be sold. It has also given bankers confidence that a borrower who can step up with a 20% deposit has a good chance of being able to service the loan on a capital city home where the median price in many suburbs is $1m or more.
But taking away from people the financial responsibility involved in coming up with a 20% deposit, the Federal Government, by reducing that requirement generally to only a quarter of what has been traditional – or in some circumstances to as low as 2% -- means almost anyone is able now to buy a house, and that means the entire property market has been jostled into a situation of elevated risk.
So, what’s to be done in circumstances where the requirement of a 20% deposit has already raised house prices beyond the reach of most first-home buyers and drastic government sponsored deductions are demonstrably hazardous?
Macks Advisory wonders whether a mandatory minimum deposit requirement of 10% for a capital city loan where house prices are still rising in many a suburb, might be a good idea? An individual or couple who can save 10% deposit on a home loan in today’s testing financial circumstances indicates there’s a reasonable chance the economy in general and the lender in particular will benefit from their ability to service such a loan.
The RBA is reluctant to lower interest rates, and if inflation persists it may even raise them next year. There are threats to the Australian economy because of what’s happening in the US (see accompanying newsletter article on this page).
Accordingly, this would hardly seem a good time for our government to be pursuing policies on housing loans that not only increase risks to the economy but to the financial welfare of thousands of Australia’s most potentially vulnerable mortgage holders -- which is why we suggest a whole lot of rethinking needs to be done on these policies.
