Not a silver bullet: Where the first-home buyer 5% deposit scheme could backfire

Property experts have warned that an extended government housing scheme will drive up property prices, meaning first home buyers are only going to be paying more for their first home.

Housing industry experts are warning that Labor’s decision to bring forward its expanded low-deposit scheme remains a flawed plan that will only drive up the cost of homes.

The Home Guarantee Scheme allows first-home buyers to enter the market with a 5% deposit while also avoiding Lenders’ Mortgage Insurance and is attracting criticism that it will put properties even further out of reach for many.

The federal government this week announced that the expanded scheme would be forward to start from 1 October, 2025, rather than from next year.

Tens of thousands of dollars will be knocked off the up-front costs of purchasing a first home, with income caps for applicants removed and property price caps expanded to better align with skyrocketing home prices.

Supply challenges remain

Kusher Consulting director Cameron Kusher can see issues with the scheme and says that while first home buyer grants were handouts of taxpayer money, this scheme has taxpayer funds directly underwriting property purchases; this disincentivises lower housing prices and maintaining the status quo of higher housing prices.

“There will be no income caps, so people that have a sizeable deposit and don’t need this assistance will be able to use just a 5% deposit, avoid LMI and purchase a more expensive property,” he says.

Mr Kusher explains that this is more demand-side stimulus occurring at a period where prices are rising and interest rates are falling, which is expected to lift housing prices even further.

“It’s also another intervention to create more buyers at high housing prices, rather than addressing supply challenges that lead to higher housing prices,” he says.

“Because this scheme is likely to lead to higher housing prices, as we’ve repeatedly seen with first home buyer incentives, it is likely to result in governments having to come up with more significant purchasing support for future cohorts of first home buyers.

“That looks as if it will be even more tax-payer support in the future, more shared equity buying, and potentially lower equity purchases.”

Driving up demand

The Green Party have been quick to criticise them scheme, saying the Albanese government’s plan won’t solve the root issues of the housing crisis.

The party instead wants to see the government wind back tax discounts for wealthy property investors that lock our first home buyers and force rents to skyrocket.

“This is a furphy designed to sound good, but actually will continue to drive up house prices, turbo-charging higher prices and bigger debts for first home buyers,” senator Barbara Pocock says.

“People will still be borrowing 95% of their mortgage, and with the median property values at eight times the typical annual household income, that leaves households highly vulnerable to huge repayments.”

She called for better action on housing, including winding back tax breaks for wealthy property investors and building affordable houses in the places where Australians need them.

“Our tax system rewards wealthy property investors and pushes up prices,”she says. “Every day that negative gearing and the capital gains tax discount stay in place is another day that first home buyers are outbid by property investors at auctions around the country.”

Crunch the numbers

While it’s good news that scheme has been bought forward after the election promise was announced in May and then was delayed, REA Group senior economist Anne Flaherty agrees that the policy won’t help add to the critical issues around the supply of new homes.

Ms Flaherty explains the policy will in fact drive up new home buyers looking come October, right in time for the spring selling season.

The announcement of the scheme back in May has already led to increased buyer demand and fuelled buyer momentum, alongside the three cash rate cuts the Reserve Bank of Australia has handed down since February.

Ms Flaherty urged first home buyers do crunch their numbers, do their homework and be certain that they are bidding for property they can actually afford to buy.

“It’s important to factor in what can you reasonably afford to pay,” she warns. “Banks are still doing their due diligence. They’re not just giving out loans to anyone who can get a 5% deposit.”

“Buying your first home is a major milestone for a lot of people and it can be an extremely stressful process. Make sure you get the help of experts to help you make a good decision, whether that be a buyer’s advocate or a mortgage broker.

“There are a lot of people out there who can help take the stress out of the process, so do your research and make sure you speak to the appropriate people,” she adds.

The potential for large crowds of new home buyers to turn up to inspect homes for sale from October when the scheme starts is another concern.

“This could in fact inflate levels of anxiety and urgency as buyers feel pressured to make an offer quickly in fear of missing out due to the increased competition,” Ms Flaherty says.

“When buyers overwhelmingly feel that home prices are going to rise, they may be more willing to pay a bit extra today because they anticipate that the value of the home will be higher in 12 months’ time.”

Buyers circling the market

Meanwhile, the Westpac-Melbourne Institute Consumer Sentiment posted solid gains in August, revealing that consumers are less anxious about finances and feel cautiously positive about the economy.

The report also revealed that home buyer sentiment has grown by 10.5%, with consumers still bullish on prices. 

The median home price in Australia is currently $827,000, according to PropTrack, meaning an average 5% deposit needed is $41,350. 

This article first appeared on Mortgage Choice and has been republished with permission.

The post Not a silver bullet: Where the first-home buyer 5% deposit scheme could backfire appeared first on realestate.com.au.