First-home buyers have been warned to plan carefully before taking advantage of a federal government scheme that would allow them to secure property with a 5% deposit, at a time interest rates are predicted to rise.
Experts say the First Home Guarantee scheme could be appropriate for people who plan to stay in one spot for a while and are comfortable riding out a possible property value trough, but warn it could still be risky, especially in regional areas.
Rising cost of living and flat wages growth should also be considerations for anyone considering the scheme, which was expanded in the federal budget to include a further 50,000 places a year and higher price caps.
At the time, the prime minister, Scott Morrison, said entering the market was getting harder and that raising the caps would make it easier for more people to secure a loan.
“These higher price caps will help more people realise their dreams and lock in a stronger future for themselves,” he said.
The scheme – which has already been used by 60,000 Australians – aims to help people get into the housing market quicker by allowing mostly first-home buyers to snag a property with a deposit of as little as 5% of its market value.
But research director at financial comparison service RateCity, Sally Tindall, said the predicted cooling of the housing market and multiple RBA rate hikes could lead to problems.
“If you factor that into an equation with a first-time buyer who buys at the peak with a wafer-thin deposit, that could spell danger if they can’t keep up with their mortgage repayments,” she said.
“Just because the government is putting it forward as a solution to Australia’s housing affordability crisis, that doesn’t necessarily make it a good idea for you.”
While she and other experts said the banks’ assessment processes before a loan is approved through the scheme should protect some people, they could not protect against every eventuality.
“Life can often throw curveballs that you can’t factor into an equation like this,” Tindall said.
“If first-time buyers don’t have a decent buffer to fall back on, they could end up having to have a tough conversation with their bank.”
She also said that buying in a regional area could be risky if the great country relocation slowed and the property lost value, and that it might not regain as quickly as a place in the city.
The scheme’s cap has been raised from July to $900,000 for Sydney and larger regional cities across the state, including Wollongong and Newcastle. The cap for the rest of New South Wales has gone from $600,000 to $750,000.
The limits are similar in Melbourne and larger Victorian cities at $800,000, and $650,000 for the rest of the state, increases of $100,000 and $150,000 respectively.
The founder of data analytics firm SQM Research, Louis Christopher, said the combination of the scheme and current economic factors could see people go into negative equity very quickly.
“It would severely limit your lifestyle … and it also locks you in until you’re out of negative equity because if you sell your property, you still owe the bank money,” Christopher said.
“There is a reason why the banking sector and us experts strongly recommend putting down greater deposits … so one can withstand a downturn early on in your homeownership.”
He said most city properties would probably recover from a minor slump but “it’s quite possible you could have a downturn that lasts for years”, and that the regional market was historically far more volatile.
But not all experts were as pessimistic about the regions.
Chief economist at the University of Technology Sydney, Prof Tim Harcourt, said regional Australia was in a better position now than it was a few decades ago.
“We’ve seen this great relocation during the pandemic and some of the regional growth has been quite successful,” Harcourt said.
“For regional cities, the prospects are quite bullish. For very, very small country towns, sure, don’t hold on. But for places like Orange and Ballarat, the prospects are pretty nice.”
Economic policy program director at the Grattan Institute, Brendan Coates, said anyone with major loans needed to be paying attention to what was going on.
“The warning for everyone who’s taken out a loan – particularly for people that are highly leveraged – is that high interest rates are coming and they’re coming soon,” Coates said.
“For people that either have taken out a loan or are looking to take out a loan, [they] should be budgeting on the basis that interest rates are going to be substantially higher than they are today.”
