New first-home buyers' scheme - good economics or bad?

The Australian government may provide a guarantee for 15 per cent of the loan for first home buyers, but buyers still have to be able to pay back what they borrow.

The Australian government has pledged a new first-home buyers' scheme that allows a minimum 5 per cent deposit. Is it wise to encourage home buyers with limited savings to enter the property market when interest rates are low?

Professor Mark Crosby

Director of the bachelor of International Business Program at Monash University

Professor Mark Crosby.Australia’s problem is not first-home buyers’ access to housing. The problem is that about 40 per cent of Australia’s population jockeys for housing in about 0.03 per cent of land mass, leading to high land prices in the cities. Consequently, the traditional quarter-acre block is not affordable for new city-home buyers, and no recent home buyer scheme will change this fact. If we really want to make housing more affordable, we need to reduce the housing footprint, and this requires changes to urban planning rules and other measures to increase housing density.

The latest first-home buyers’ scheme benefits first-home buyers, but has a marginal impact on pushing up house prices. A worry I have with this scheme is if we allow first-home buyers to buy with a deposit of 5 per cent, they may quickly have negative equity in their homes, potentially destabilising the economy.

The real issue is why we care so much about home ownership rather than housing quality. In many countries, such as Switzerland, home ownership rates are far lower and yet housing quality is still very high. Presumably, first-home buyers are more important politically in Australia because they are more politically active than the homeless, but surely homelessness is a far greater problem.

“If we allow first-home buyers to buy with a deposit of 5 per cent, they may quickly have negative equity in their homes, potentially destabilising the economy.” Professor Mark Crosby

Tackling housing access requires measures to increase high-quality, low-cost housing, which requires the housing footprint in our cities to be much smaller. There is nothing in the new policy to make this the case.

Paul Drum FCPA

General manager, External affairs, policy and advocacy, CPA Australia

Paul Drum.The question should be whether it is appropriate public policy to implement this scheme. CPA Australia looks at economic and social policies through the prism of whether they raise standards of living. Does the new first-home buyers’ scheme potentially encourage people to over borrow? Does it artificially inflate housing prices in cities? I think the answer may be yes to both questions.

People may have more capacity to enter the market with less of a deposit, but they are still on the hook for the amount they borrow. Interest rates are at a record low and while there may not be any prospect of an increase in the short term, first-home buyers who may not be well-attuned to personal finance issues may end up over-exposing themselves financially.

The objective of the scheme is for more people to be able to enter the market, but it may not achieve this if prices respond to more money in the economy. CPA Australia has said housing affordability is more of a supply issue than anything else. The supply has a lot to do with the release of land in the states and territories, and is generally not a federal government issue. We acknowledge what the government is trying to do with this scheme, but it’s not a silver bullet in itself.

“Does the new first-home buyers’ scheme potentially encourage people to over borrow? Does it artificially inflate housing prices in cities? I think the answer may be yes to both questions.” Paul Drum CPA

The government may provide a guarantee for 15 per cent of the loan, but let’s not forget that buyers still have to be able to pay back what they borrow.

Adrian Kelly

President, Real Estate Institute of Australia (REIA)

Adrian Kelly.The announcement of the new first-home buyers’ scheme was good news. Now is a good time for first-home buyers because the investor market has started to wane and prices appear to have settled a little.

Entering the property market has been a challenge for first-home buyers for the past five years due to rising prices, the deposit gap, mortgage insurance and stamp duty costs.

It can be difficult to save the required deposit to avoid paying mortgage insurance, especially if first-home buyers have been in the rental cycle. Responding to findings from the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, banks tightened their lending practices and it became more difficult for home buyers to borrow money with less than a 20 per cent deposit. The average number of first-home buyers in the first four months of this year was 8696 a month, down 15-20 per cent from the last four months of 2018.

“The announcement of the new first-home buyers’ scheme was good news. Now is a good time for first-home buyers because the investor market has started to wane and prices have appeared to settle a little.” Adrian Kelly

Importantly, the first-home buyers’ scheme is not a free-for-all. Single people earning up to A$125,000 or couples earning up to A$200,000 will be eligible if they have saved at least 5 per cent of the value of the home, but it’s limited to 10,000 first-home buyers.

The full details of the scheme are yet to be established. How will it be implemented? How will regional and state equity be assured and how will it account for market differences across the country? REIA will be involved in sorting out some of these details.

CPA Australia Podcast: CPA changemakers: a discussion on housing affordability. Listen now.

Meet the experts

Professor Mark Crosby
Professor Mark Crosby is director of the bachelor of international business degree program at Monash University. His expertise is in international economics and he is a regular consultant, writer and media commentator in Australia and Asia.

Paul Drum FCPA
Paul Drum FCPA is general manager, external affairs, policy and advocacy at CPA Australia. He has over 30 years’ experience in public policy internationally. 

Adrian Kelly
Adrian Kelly has worked in the real estate industry since 1990. He is the founder and CEO of View Real Estate, an independent agency comprising seven sales and property management offices across Tasmania, and president of the Real Estate Institute of Australia.


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