Home ownership is slipping out of reach for many younger, poorer Australians. Many older Australians who rent are also being left behind.
The government’s Help to Buy Bill would establish a national shared equity scheme would help level the playing field.
The Help to Buy scheme is similar to a scheme Grattan Institute recommended in 2022. And it builds on existing state shared equity schemes, like Western Australia’s KeyStart program, which has been in operation for more than two decades.
Help to Buy would help younger people
Home ownership is slipping out of reach for many younger Australians, largely because it takes much longer these days to save for a deposit.
In the early 1990s it took the average Australian about seven years to save a 20 per cent deposit for a typical dwelling. Now it takes almost 12 years. Unsurprisingly, a growing proportion of Australians now rely on the ‘Bank of Mum and Dad’ to buy a home.
Even if federal and state governments adopt much-needed reforms to lift supply and reduce demand, house prices are likely to remain high, relative to incomes.
If house prices were to fall by 20 per cent from current levels, it would still take the average Australian about nine years to save a 20 per cent deposit on the average home.Therefore, the deposit hurdle is likely to remain a problem for younger, poorer Australians without a ‘Bank of Mum and Dad.
Help to buy would help older renters too
Help to Buy could also be particularly helpful for older renters who do have a deposit but who won’t be in the workforce long enough to pay off a home by the time they retire.
Many older Australians were never able to break into the market as prices far outstripped incomes. Others have found it too hard to get back in after losing the home after a separation. Less than half of women who separate from their partner and lose the house manage to purchase another within 10 years.
Unsurprisingly, older women that have separated or divorced are more than three times as likely to rent at age 65 years than married women, whereas separated men are more than twice as likely.
Today’s older renters risk joining tomorrow’s renting retirees, nearly half of whom already live in poverty. Help to Buy offers them a pathway back to home ownership and a more secure retirement.
But Rent to Buy can be improved
Beyond these benefits, there are drawbacks to the government’s plan.
The income thresholds for the scheme – $90,000 for singles and $120,000 for couples – are too high. About 75 per cent of working-age singles earn less than $90,000, and 39 per cent of couples earn less than $120,000.
It’s hard to argue for offering the scheme to people earning above-average incomes, because they have a good chance of buying a home anyway.
Also, requiring borrowers have just a 2 per cent deposit, rather than a minimum of 5 per cent as we proposed, increases the risk of them falling into negative equity if house prices fall.
And the house price caps should be reduced to match those available for stamp duty concessions for first home buyers, which typically begin phasing out in most states for homes valued above $650,000.
Better targeting the scheme in this way would mean the annual cap on the numbers of places could gradually be raised.
Whereas the current scheme risks becoming a lottery, because the income thresholds are set at such a level that many more people are eligible than the 10,000 places available each year.
The impact on house prices would be tiny
Shared equity schemes can add to house prices, by adding to housing demand. Which is why the main game remains making housing cheaper by building more of it.
But the impact on prices of this capped scheme is likely to be very small. With just 40,000 places on offer over four years, it’ll have close to zero impact on house prices in the context of Australia’s $10.3 trillion housing market.
We estimate that after four years, the 40,000 places on offer could result in overall house prices rising by about 0.016 per cent ,or $113 for a $700,000 home.
If the scheme were uncapped, but better targeted as we propose, it would still only have a small impact on house prices.
Our modelling shows that for every 100,000 homes the governments helps finance through the scheme, house prices would rise by 0.04 per cent, or $283 for a $700,000 home.
Parliament should pass the government’s Help to Buy scheme, because it will help some Australians to own their own home.
But better still would be a more targeted scheme, which wouldn’t need to be rationed, and which would help more Australians that are struggling to own their own home.
That could be achieved by gradually expanding the number of places offered, such as following an initial review of the scheme after the first three eyars.
Help to Buy isn’t a panacea for our housing woes
While important, shared equity is also no panacea to Australia’s broader housing affordability crisis.
After decades of neglect on housing policy, Australia urgently needs governments that will stop pretending there are easy answers to the housing crisis.
First, the federal government must follow through on the commitments it has made to encourage the states to enable a boost to the supply of housing – because the long-term solution to Australia’s housing crisis is to build more houses.
Second, the government should further raise commonwealth rent assistance. Last year’s 15 per cent increase should be turned into at least a 40 per cent increase. This would provide an extra $1,000 a year to nearly one-third of all renters, at a cost to the budget of about $1.2bn a year.
Third, the government should halve the capital gains discount and curb negative gearing.
These changes would not have much impact on housing affordability – our modelling suggests house prices might fall by no more than 2 per cent. But these changes would help more renters to become homeowners, because they would be bidding against fewer investors at auctions.
And fourth, the federal government must push the states to strengthen tenancy laws to ensure to give renters greater security of tenure, and to allow them to make their house their home.