The federal government’s new First Home Buyer initiative is a godsend. This action is only the latest in their holistic approach towards rectifying the housing crisis. The program starts on October 1st. It allows local and state governments, as well as community development financial institutions, to cover a portion of a home’s purchase price, thus receiving an equally proportioned share of home value. This program performs the function of the guarantor and accounts for the other 15% of the home’s value. As a result, buyers are able to bypass costly lender’s mortgage insurance (LMI).
The program is an important form of financial relief to first-time home buyers by removing the burden of lender’s mortgage insurance. This deletion can cost them around $50,000 on a $1 million parcel. The program increases homeownership opportunities for potential first time homebuyers. For example, would-be homebuyers at the national median home price of $844,000 would only require an average down payment of $42,200.
The federal government should be commended for thinking big with the National Housing Accord. Starting in 2024, they propose to have 1.2 million well-located new homes produced within five years. Each subsequent planning target has been lowered, and that goal would mean roughly 240,000 new homes annually. Critics caution that absent significant housing supply increases this scheme will likely worsen existing market pressures.
Beginning October 1st, the criteria for eligibility under the scheme will change drastically. The government aims to remove income limits and uptake caps. They’ll raise property value limits to bring them more in line with national averages. These changes will be a major incentive for first home buyers to return to the market.
While this is a positive development, the newfound demand will drive up property prices, particularly because property supply has not kept pace. Experts caution that a smaller deposit simply results in a larger loan that covers 95% of a property’s value, increasing financial vulnerability among new buyers.
As professional property analyst and researcher, Dr. Nicola Powell warns, the scheme has the potential to unintentionally drive up property prices without increasing new supply. “If you’re increasing demand in a certain segment of the market without increasing supply, what that is going to do is push up property prices,” she states. She goes on to explain how this may disproportionately impact the delivery of the most affordable stock of homes in our largest capital cities.
UTS Professor Nicole Gurran says she is very concerned about the impact of this policy on low income earners. These people still live with extreme housing insecurity. “At the end of the day, everyone’s going to be paying a little bit more,” she argues. “You’ve got more than half a million renting households who get nothing.” Gurran is careful to stress that the scheme provides immediate benefits for some purchasers. Despite its promise, it leaves low-income people behind.
Housing Minister Clare O’Neil defends the initiative, stating, “This policy is going to have a hugely meaningful impact for the people who choose to use it.” She understands the challenges that youth face in achieving homeownership. For most of them, that means saving for eight or nine years just to have enough for a deposit. The new creative capital scheme would allow that timeline to be cut down dramatically.
“This allows individuals, couples, and families to purchase with a much lower deposit and avoid lenders mortgage insurance, saving tens of thousands of dollars,” O’Neil explains. While all of this makes the electric vehicle market exciting and beneficial, experts say buyers need to be careful when assuming such heavy debts.
That’s a situation that Dr. Powell warns can put buyers at risk of greater financial vulnerabilities when they buy with such a little deposit. “If we do see property prices pull back at some period of time, it can put you at the risk of having negative equity,” she warns.
