Housing incentive investigation: Why does government cash only help some Aussies on to property ladder?

If Peter and Paul were alive — and not just mythical figures used to explain winners and losers — they would be a couple of housemates renting in Perth. They would be fairly regular 20-somethings who are trying to save for a home and not wasting too much money on “smashed avo”. Paul would jump at the chance to buy his first home under the expanded New Home Guarantee scheme, recently announced by Prime Minister Scott Morrison, using his $25,000 in savings to buy a $550,000 townhouse. He knows he has to jump in quickly because the incentive will lure a lot of new first-time buyers into the market and the simple and indisputable laws of supply and demand will force up prices as a result. Meanwhile Peter, who doesn’t have any savings, will watch house prices slip further out of reach, wedging him a little further into the rental trap. He will not save enough to get in before the scheme runs out. By the time he is eventually able to buy, he will need the full 20 per cent deposit on recently jacked-up house prices. In this case, it is public policy that has indirectly robbed Peter to pay Paul? Governments lend a helping hand The Morrison Government’s recently announced expansion of the New Home Guarantee scheme is not the first initiative, and by no means the last, to distort the property market in a bid to curry political favour. Efforts to help people on to the property ladder appear to have started with the Menzies government in 1964, followed by the Whitlam and Fraser governments of the ’70s, the Hawke government in 1983, the Howard government in 2000 and 2001 and then prime minister Kevin Rudd in 2008 and 2009. The latest initiative may on first glance seem small but its impact on the market cannot be underestimated. Under the New Home Guarantee, a total of 50,000 first-homebuyers — well above the existing cap at only 10,000 — will be able to buy their first home with a 5 per cent deposit instead of the usual 20 per cent. The Government will guarantee the other 15 per cent — though will not pay it for them — and the purchaser does not have to pay lender’s mortgage insurance. That means an entry-level buyer needs only a $25,000 deposit on a $500,000 home instead of $100,000, sparing them the time it takes to save $75,000. The expansion also increases price caps for eligible homes to $600,000 in Perth and $450,000 in regional WA from next financial year, up from the existing price cap of $500,000 in the capital and $400,000 in the regions. The scheme has the potential to cover WA’s 15,000 annual first-homebuyers, and more. The WA impact Respected WA property analyst Gavin Hegney, said the impact of the loan guarantee in WA was likely to be more extreme than any other State. The reason is because WA is the only place where the threshold — now set at $600,000 in Perth — has been increased above the existing median price, which now sits between $520,000 and $540,000, depending on who you ask. In every other State, the threshold is tens of thousands — or even hundreds of thousands — of dollars below the median price. The impact of feeding newly created demand for homes up to $600,000 into a relatively short period of time during a period of limited housing supply, according to Mr Hegney, will be a significant boost to Perth’s median price. “With the threshold set at $600,000, it will create a logjam just below this amount,” he said. “It really dislocates the market. What can happen is that you can’t sell a property for $610,000, but you can sell a home for $590,000 50 times over. “It will result in the median house price increasing in WA, because the threshold is above the median. Homes will jump from $500,000 to $600,000 pretty quickly. “(This incentive) has the scope to add 5 to 10 per cent to the median house price in the next 12 months. That is $50,000 to $100,000 more.” Mr Hegney said it was equivalent to adding an amount equal to the average annual wage to the value of a median-priced home. “It will create winners and losers, because it will help some people on to the property ladder but for some renters, home ownership will get further out of reach,” he said. East coast commentators have complained that the initiative encourages first-homebuyers into the market just as interest rates are about to rise and property prices are about to fall. Those who believe WA property prices are about to fall off a cliff with rising interest rates are unlikely to see any benefit in the scheme, given it will lure people into the home ownership at a time values are set to fall and interest rates are set to rise. Commonwealth Bank economists are among the most pessimistic about WA property prices, predicting they will rise 3 per cent this year and drop 6 per cent in 2024. But Mr Hegney, like the Real Estate Institute of WA and several other local analysts, is confident Perth property prices will continue growing strongly in the next few years. With WA property prices currently the most affordable in the nation and the State having the nation’s strongest economy, double-digit price growth is expected this year. Mr Hegney said that while it was irresponsible to encourage people into home ownership on the doorstep of rising interest rates and falling prices in some cities, the policy could benefit some West Australians who got in quickly, before market prices responded. “The policy works for Western Australia,” he said. “You could say it is a policy for Western Australia.” The rest of Australia Some parts of the east coast will not see any benefit from the initiative. In fact, first-homebuyers may be foolhardy to use it. Analysis by RateCity.com.au shows if someone bought in Sydney using the scheme at the end of this year, they could potentially find their equity, which started at 5 per cent, drop to -6 per cent by the end of 2024. At this point, the owner will owe the bank more than the property is worth. The same person would see their monthly repayments rise by an estimated $539 by the end of 2024 due to rising interest rates. Calculations based on Westpac’s cash rate and property price forecasts also show that someone who buys using the scheme in Melbourne at the end of this year, will see that their equity could drop to -7 per cent by the end of 2024. Economist Saul Eslake went further, describing the expansion of the home loan guarantee as “hare-brained”. “This is just another example of the failure to learn from history that first-homeowner grants and stamp duty concessions result in more expensive housing, not in more people owning housing,” he said. Mr Eslake said the real beneficiaries of the scheme were the people selling the homes, because they would enjoy an artificially inflated sale price. The ‘smashed avo’ generation First-homebuyers Jasmine Robinson and Michael Rushbrooke support initiatives to help people buy their first home, knowing full well the pain of saving for a deposit. The stereotype — mostly held by baby boomers — was that young people wasted their money on fancy smashed avocado breakfasts and only wanted to live in penthouses. But Dr Robinson said while it was true for a small number of people, most prospective buyers were careful with their money. She said she and her partner had lived on the bare minimum for three years, squirrelling away their savings from their professional jobs in the medical field to get a deposit for their recent purchase in Alfred Cove. The pair’s biggest luxury was a trip to Margaret River, which they did in off season to get cheaper accommodation rates. They barely ate out and did not buy new clothes or shoes, even when her partner’s shoes got holes in them. Together they saved a six-figure sum, which enabled them recently to buy a $915,000 home in Alfred Cove. “It was really, really hard to save the deposit,” she said. The pair wouldn’t have qualified for the home loan guarantee because the value of their home exceeds the threshold, but felt compelled to speak out to support incentives to help first-homebuyers, given their own challenges in getting on the ladder. “We were competing against baby boomers who were buying investment properties,” she said. “There was not one single home open that we went to where there was not someone looking to buy the home as an investment.” She said baby boomers had enjoyed a much easier era, when homes were much cheaper in relation to the average wage, even with inflation taken into account. She is careful to acknowledge her privilege in buying an expensive home, explaining it was a decision made in the knowledge it would be repaid with two incomes. The pair were also keen to buy a home that would last them for decades, in a bid to avoid stamp duty and other costs associated with buying and selling property. She called for more stamp duty relief for all buyers. Her advice to others wanting to get on the property ladder was to save while living with one’s parents. “I definitely have to recognise I have had some privilege here, because some people have to pay rent,” she said. “I think if there is some peace at home, and if you can tolerate it, then stay at home to save on rent. But I do understand that people want their freedom.” The Agency’s property partner Vanessa Naso said the impact of incentives on the market was immediate. She said first-homebuyers these days were cashed up because they had been unable to travel in recent years. Politically popular Curtin University professor of economics Rachel ViforJ said historically, all major parties took the view that home ownership was good, assuming that mortgages paid off before retirement meant less pressure on the pension system. She said the focus had long been overcoming the major hurdle of deposits, an amount that was very hard to save even for people who could comfortably service their repayments. But in a hot market, giving people lump sums invariably pushed up property prices. “Often you’ll find that people who are in the best position to take up these schemes are people who may be able to get in anyway in five years time but it helps them to get in earlier,” she said. “It’s just shifting the timing rather than actually helping more people in. “And at the same time, pushing up house prices.” While the UK model was based on incentives spread out over time — reducing the price-pushing impact of lump sum inducements — the problem in Australia was the need for a big deposit due to hefty stamp duty. Professor ViforJ is in favour of a previously suggested move to remove upfront stamp duty — a big source of revenue — and replace it with an annual land tax. This kind of smoothing out should not push up house prices. “I think it’s a better option,” she said. She said homebuying incentives were no doubt election sweeteners to appeal to younger voters. “If they were really, really serious about dealing with this issue of getting people into home ownership they’d want to be looking at trying to level off the house price growth,” she said. “I’m not advocating for a housing market crash but the fact is that house prices have grown at a far faster rate than incomes have so it’s no doubt that younger people are getting left behind in terms of their ability to buy their first home. It’s really not a good idea to be pushing policy that is going to further push up house prices but it’s never popular to say we’re going to do something that is potentially going to cause house prices to level off or even fall. “That’s not politically popular.” Time will tell CommSec chief economist Craig James said it was understandable that governments would provide stimulus during uncertain economic times but whether it was too much would be known after the fact. He said the jury was out on the latest move, claiming the pre-election expansion of the home guarantee scheme was announced when it was clear the property market was totally overheated. “It is targeting the area of the market which is finding it hard to get in,” Mr James said. “You need to do something special to assist people in the current times. “In more normal circumstances, they might have had a chance to get their own home, but given the amount of activity, they (those struggling to raise a deposit) are the ones finding it the hardest.” He agreed the impact of some initiatives could be to push up prices of homes rather than help people into homes. “Clearly it’s a good aim to try to get people into their own homes,” he said. “You just want them to be effective measures, beneficial for first-homeowners and not disadvantageous for the broader market. “If it’s applied at a time of significant activity on the market and super-low interest rates, and you’ve got second and subsequent homebuyers, you’ve got investors as well, you’re just adding another string to the bow by giving first-homeowners a leg up. In more subdued times, it may not have the same sort of affect. “The other thing it can do is bring forward purchases months or even a year before people were intending to go into the market and once the grants stops, the market falls in a heap. “It really needs to be thought out very, very carefully.”