‘Really worried’: Expansion of government home loan guarantee concerns experts

A government decision to extend policies to help first-home buyers break into the housing market has been criticised by property experts for making housing less affordable.

Up to 50,000 places each year are now available across three home loan guarantee schemes that allow buyers to snap up properties with deposits as low as 2 or 5 per cent of the purchase price without having to pay lenders’ mortgage insurance.

Treasurer Josh Frydenberg revealed on Monday that the government would now offer:

  • 35,000 guarantees each year – up from the current 10,000 – to eligible first-home buyers under its First Home Guarantee scheme, which allows participants to buy properties with deposits as low as 5 per cent (from July 1, 2022)
  • 10,000 guarantees each year to eligible home buyers, including non-first-home buyers and permanent residents, under a new Regional Home Guarantee (from October 1, 2022 to June 30, 2025)
  • 5000 guarantees each year to single parents under the Family Home Guarantee scheme, which allows eligible buyers to purchase property with deposits as low as 2 per cent (from July 1, 2022 to June 30, 2025).

The Morrison government says the expanded schemes will help Australians break into the market sooner than they otherwise would have done by lowering the deposit hurdle.

But economists said the beefed-up schemes would drive up property prices by boosting demand without boosting supply.

And personal finance experts said Australians would be saddled with “huge” debts for decades to come.

Guarantees push up prices

Because the scheme is five times larger today than it was when first announced before the 2019 federal election, Grattan Institute economic policy program director Brendan Coates said it could push up house prices.

As of March 2021, there were about 155,000 first-home buyers in Australia, meaning the Home Guarantee Scheme could now help almost one in three first-home buyers every year.

Mr Coates said adding so much demand to the market could push up prices.

Not least because it is unlikely to be met with a big jump in supply, according to Curtin University property expert J-Han Ho.

Supply not meeting demand

Australians faced major construction delays and shortages during the pandemic as large numbers rushed to build new homes.

Dr Ho said off-the-shelf homes usually built within four months were now taking upwards of two years to complete.

With more people set to take advantage of the Home Guarantee scheme, he said he was “really worried” that housing supply would fail to meet demand.

More financial incentives won’t increase the supply of housing as issues with labour, logistics and materials will persist, he said.

Instead, it will only drive “artificial” price hikes and leave people on the hook for mortgage repayments in addition to rent as they wait for their home to be built.

“It just scares me because you’re pushing all these people into home ownership … but there is no real way to guarantee the supply can actually come on to the market to ease the load off,” he said.

And if house prices go down, Dr Ho said this will also negatively affect home owners’ net wealth.

Home loan worth more than your house research director Sally Tindall said in a market where property prices have been on the rise, the risks of the Home Guarantee Scheme have been “subdued”.

But prices are expected to drop over the next couple of years.

This means people who take advantage of the scheme this year could end up paying off a mortgage that is more than the value of their property, resulting in negative equity.

Since it is difficult to refinance until you own 20 per cent of your home, Ms Tindall said you could find yourself locked into this situation, which will be worsened by rising interest rates.

Interest rates charged by participating lenders under the scheme also tend to be higher than elsewhere in the market.

Dr Ho said this is because borrowers who only pay a deposit of up to 5 per cent haven’t demonstrated their saving ability to banks as well as someone who can pay a deposit of 20 per cent.

Scheme not the answer

Although all three property experts stressed the scheme could be helpful to people entering the property market, they said it is not enough to solve affordability and supply issues.

“Basically, the government and the Opposition is saying, ‘Accept the problem as it stands, and we’ll provide you with the means to stretch yourself that little bit further, rather than actually addressing the root cause of the problem’,” Ms Tindall said.

Mr Coates said the scheme points to “a lack of ambition” from the government to fix Australia’s housing crisis.

He said housing supply needs to be boosted, particularly by reforming planning rules that make it hard to build houses in major cities, and by reforming tax rules that “distort” demand for housing, such as capital gains tax discount and negative gearing.

“We are in a world where governments are wanting there to not be losers from policies – it’s election season,” he said.

“But in the long term, that will likely lead to housing becoming less affordable rather than more.”

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