Only quickest first home buyers to benefit from expanded 5 per cent deposit scheme
By Millie Muroi and Shane Wright
The federal government is accusing the insurance industry of running a scare campaign against its election promise to help first home buyers into the property market after the sector warned it could lift house prices by up to 10 per cent.
Housing Minister Clare O’Neil said the claim was built on wrong assumptions and over-estimating demand while ignoring much larger factors affecting the housing sector including lower interest rates.
Falling house prices quickly dampen the appetite to spend.Credit: Peter Rae
The government pledged during this year’s election campaign to cover the lenders mortgage insurance imposed by lenders on all borrowers who have a deposit of less than 20 per cent of a property’s sale price, but more than 5 per cent.
On Monday, the government brought forward the start date to October 1 and revealed there would now be no caps on the number of first home buyers who could apply. Limits on the price of properties eligible for the scheme are also due to increase.
Treasury modelling of the policy suggests it will push up property prices by a modest 0.5 per cent over six years. Property values across the country grew by 0.6 per cent in July alone to be 3.7 per cent higher over the past 12 months.
But modelling in July by Nicholas Gruen’s firm Lateral Economics for the Insurance Council of Australia – which represents mortgage insurers and has campaigned against the scheme – suggests the scheme could increase annual demand by up to 39,000 buyers, driving national property prices up by 6.6 per cent in the first year, and for several years afterwards.
“This would mean that a home valued today at $800,000 would cost a first home buyer an additional $28,000 to $52,800,” the researchers argued, noting the benefit for buyers would probably be eclipsed by the increase in price of those homes.
In areas usually targeted by first home buyers (generally homes that are cheaper), price growth could be even greater at up to 9.9 per cent, Lateral Economics said. However, it noted these figures were based on assumptions that there would not be many new houses built, especially over the next 12 months.
Lateral noted that demand for mortgage insurance had fallen sharply since the first iteration of the policy was introduced by the Morrison government in 2019.
Insurance Council chief executive officer Andrew Hall said the policy would wipe out the savings of not taking out mortgage insurance while affecting the entire property market.
“While well-intentioned, the Lateral Economics modelling makes clear that many first home
buyers will be worse off under this plan, at least in the first few years of the expansion,” he said.
But O’Neil said the research ignored other policies, including the government’s plan to build 100,000 homes specifically for first time buyers, and the impact of other drivers of the property market including monetary policy settings.
She said it also ignored the huge savings for users of the scheme who will not have to pay mortgage insurance. The government estimates those savings at $1.5 billion over the next 12 months.
“It’s no wonder insurance companies are running scare campaigns about our plan,” she said.
“This is completely at odds with Treasury advice.
“We’ve got an ambitious and expansive program to build more homes across the country and make housing more affordable.”
The government estimates the policy will slash the time needed to save for a deposit by up to six years on a $600,000 property.
While it will save time and money on rent, the much smaller deposit means borrowers will take on higher repayments.
The median price for a home in Australia is currently $844,000. With a 20 per cent deposit, a prospective buyer would have to borrow about $675,000 at a monthly repayment of $4270.
A 5 per cent deposit amounts to $42,200, leaving the buyer with a loan of $800,000 and monthly repayments of $5063.
Luke Bindley, 28, co-founder of Sydney-based business Austin Buyers Agents, is also looking to buy his first home. While he says the government’s scheme will help some buyers, Bindley, who is saving up for his own 20 per cent deposit, says he is unlikely to use the scheme.
“It will certainly open doors for some buyers who have been locked out of the market,” he said. “But at the end of the day, a small deposit means that you’re borrowing more and taking on higher repayments.”
Buyers agent Luke Bindley said the government’s scheme would be unlikely to benefit him.
Opposition housing spokesman Andrew Bragg said the nation already had a problem with middle-class welfare, arguing that by ditching income restrictions on the scheme it would be opened up to the children of billionaires.
Treasury modelling of the policy suggests it will push up property prices by a modest 0.5 per cent over six years. Property values across the country grew by 0.6 per cent in July alone to be 3.7 per cent higher over the past 12 months.
But Bragg said he believed the impact could be substantially more.
Credit: Matt Golding
“Given it’s uncapped and not means-tested, I would say that the change in the demand side could actually be quite material,” he said.
Housing Industry Association chief economist Tim Reardon says he estimated the government’s scheme would spur construction on up to 10,000 additional new homes every year.
“There will be drawing forward of demand, but there can be no doubt that it has a positive impact on supply of homes, too,” he said, adding that in three years time, the supply would have caught up with demand and would put downward pressure on house price growth.
“When John Howard introduced the policy [lenders mortgage insurance] for first home buyers, he forced a lot of first home buyers out of the market because it increased the cost of borrowing, and that led to a reduction in the supply of new homes. Now that the policy is being reversed, it has to have an opposite impact.”
AMP deputy chief economist Diana Mousina said the policy would drive up property prices, and that only a small portion of first home buyers would benefit from the scheme.
“Generally, boosts to first home buyers, such as grants and loans, are inflationary for house prices,” she said. “You’ll benefit if you’re lucky and get in before prices start going up, but you’ll lose out if you get in after they’ve already started rising.”
Greens housing spokeswoman Barbara Pocock said not only would the plan add to price pressures, it meant borrowers would have larger mortgage repayments for longer.
“People will still be borrowing 95 per cent of their mortgage and with median property values at eight times the typical annual household income, that leaves households highly vulnerable to huge repayments,” she said.
Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up to our weekly Inside Politics newsletter.