Coalition’s plan won’t spark home ownership recovery among young
Published by The Sydney Morning Herald, Sunday 13 May
The Coalition’s new First Home Loan Deposit Scheme seeks to tackle a big concern. Home ownership is falling fast in Australia, especially among the young and poor. Less than half of 25 to 34-year-olds own their home today. Even fewer poorer Australians own their homes.
The scheme would lend new buyers up to 15 per cent of the purchase price, provided they’ve saved at least 5 per cent already. It would be available to first homebuyers with an income of up to $125,000 or a couple with $200,000, helping them avoid paying lenders’ mortgage insurance. Banks usually demand this from purchasers with less than a 20 per cent deposit, costing them around $10,000.
The Coalition’s plan addresses a big hurdle to home ownership: the time it takes to save a deposit. In the early 1990s it took six years on the average income to save a 20 per cent deposit on the average home. Today it’s 10 years.
The scheme would increase home ownership and prices a little. Some Australians saving for their first home could buy earlier, adding to demand. Others could pay a little more if they don’t have to front for lenders’ mortgage insurance on top.
But the impact of the scheme will be small. It’s capped at 10,000 loans every year, or about one in every 10 loans made to first-home buyers last year. Even if every one of those 10,000 couldn’t have bought otherwise, home ownership would only be 1 per cent higher after a decade.
Nor would an expanded scheme help: few would take it up. Most first homebuyers want more than a 5 per cent buffer. They worry what might happen if home prices fall and they owe more than the home is worth, they lose their jobs, or if interest rates rise and their wages don’t.
And it’s harder to qualify for a mortgage than in the past. Banks must assess borrowers’ ability to repay the loan assuming an interest rate of 7 per cent, much higher than the typical rate of 4 per cent that most homebuyers are actually paying today.
The big question for the Coalition’s scheme is what happens if buyers start defaulting. Default rates are still very low. But if they rise, whichever banks lends the other 80 per cent would want to get their money back first. And knowing that government is providing this buffer, banks may be more prepared to take foolish risks on who they lend to because someone else is paying for them.
In any case, despite the new scheme, most Australians won’t be able to afford a home unless housing becomes cheaper to rent or buy. Which means fixing land use planning rules that prevent higher density and so make housing so expensive in the first place.
Perhaps the best that can be said for a plan announced in the last week of an election campaign is that it won’t do much harm.
At least the Coalition didn’t resort to yet another first homebuyers’ grant scheme that would only push up prices at substantial cost to government. But we should all be realistic that it won’t spark a recovery in home ownership among younger Australians.