Federal Budget 2021-22

Increasing home ownership on the coalition’s term

Housing affordability is becoming an increasing concern for first home buyers and policy makers amid recent, rapid price increases in housing values. But the double-edged sword of reducing housing values to make them more affordable, is that housing also makes up the majority of Australian household wealth; make housing more affordable for one Australian, and we risk reducing the wealth for another.

Single parents will be given federal government assistance to purchase property

Under this policy, known as the ‘Family Home Guarantee’, the government will guarantee 18% of a home loan for 10,000 eligible single parents, whether they are first home buyers or previous owner-occupiers. This essentially enables property purchases with a 2% deposit, without the borrower paying lenders mortgage insurance (LMI). Based on a typical entry level Australian dwelling value ($431,194), this could reduce a deposit requirement from around $86,000 to $8,600. Ten thousand places for the scheme are to be provided over four years.

While full details are set to be outlined next week, the Family Home Guarantee seems well targeted. Single parent households tend to have lower rates of home ownership than other household types. Single parent households are also largely headed by women, making up around 64% of lone parent and lone adult households. As a result, this policy may contribute toward narrowing the gender wealth gap.

However, low deposits mean more debt. More debt means more interest needs to be paid over the life of the loan. At the entry level property value used in the example above, a 20% deposit home loan at a 2.4% interest rate would accrue roughly $121,000 in interest over a 25 year mortgage with monthly payments. The same borrowings at a 2% deposit would amount to around $145,000 in interest. Taking on more debt may still be worthwhile if the borrower is otherwise spending tens of thousands of dollars each year on rent. Even more beneficial could be the long term gains in real asset values that come from accessing ownership earlier with a lower deposit, which could be another factor helping to outweigh the additional interest paid.

The government will extend the first home loan deposit scheme (new homes) by 10,000 places

The initial round of the federal government First Home Loan Deposit Scheme, introduced at the start of 2020, was extremely popular with first home buyers. The majority of the initial 10,000 places were reserved within two months of its launch.

This signifies just how much of a barrier the deposit hurdle is to accessing housing. But first home buyer incentives amid economic uncertainty also have precedence. The first home buyer remains an important source of potential housing demand, particularly as the relatively large millennial generation is now around the typical first home buyer age.

The additional 10,000 places introduced through 2020, which was just for new dwelling purchases, is being re-deployed and re-branded as the ‘New Home Guarantee’ in the Budget. This is unsurprising, with most of the housing incentives introduced for first home buyers since the start of 2020 being specifically for new supply. While there is evidence to suggest first home buyers prefer established housing, incentives designed specifically for the purchase of new property have been successful in funnelling new demand into new builds.

The benefits of such a policy are advocated to be two-fold, creating seemingly easier access to home ownership, as well as generating economic activity in the construction sector. For example, the Morrison government touted HomeBuilder as creating “more opportunities for first home buyers to enter the property market” while also helping to “fill the gap in construction activity expected in the second half of 2020”.

Diverting new demand into new property can also insulate the established market from additional price increases, by providing a new unit of supply for each new unit of demand.

However, demand-side policy for new housing can put upward pressure on the cost of construction, with anecdotes of increased supply chain costs and labour shortages becoming increasingly common. As dwelling approvals and commencements surge off the back of HomeBuilder, it is possible that the purchase and construction of new homes could actually become more expensive for first home buyers in the short term.

In the longer term, there is concern that a chunk of first home buyer demand has been brought forward by the strong take up of HomeBuilder, the FHLDS, and other state-based incentives. This was acknowledged in the budget papers, with a recent surge in construction activity representing a “bring-forward in demand from future years”. The chart below, which utilises ABS housing finance for data for first home buyers, highlights how FHB activity can be concentrated around government incentives.

Link: Federal budget 2021-22: Increasing home ownership on the coalition’s terms (corelogic.com.au)