The government is planning to expand the Home Guarantee Scheme, which allows first home buyers to purchase with a deposit of as little as 5 per cent. But what might that mean for prospective home-owners?
In the budget, the government announced it would expand the number of places for the scheme to 35,000 a year, up from 10,000.
It also continued a low-deposit purchase scheme targeted at single parents with up to 5,000 places a year and announced an additional regional home buyer scheme, similar to a policy that had previously been announced by Labor, with 10,000 places.
In the latest announcement from the Prime Minister and Housing Minister the government committed to raise the price caps for properties eligible under the schemes.
Most capital cities saw an increase in the cap of $100,000, while the ACT and many regional areas had their caps boosted by $150,000, in an attempt to keep up with house prices that have soared over the past 18 months.
Home price caps
2021-2022 FY |
2022-2023 FY |
|||
|---|---|---|---|---|
Area |
Capital city and |
Rest of state |
Capital city and |
Rest of state |
NSW |
$800,000 |
$600,000 |
$900,000 |
$750,000 |
VIC |
$700,000 |
$500,000 |
$800,000 |
$650,000 |
QLD |
$600,000 |
$450,000 |
$700,000 |
$550,000 |
WA |
$500,000 |
$400,000 |
$600,000 |
$450,000 |
SA |
$500,000 |
$350,000 |
$600,000 |
$450,000 |
TAS |
$500,000 |
$400,000 |
$600,000 |
$450,000 |
ACT |
$500,000 |
$750,000 |
||
NT |
$500,000 |
$600,000 |
||
Source: Australian Government
REA Group's executive manager of economic research Cameron Kusher said the increased caps were still below the typical house price for Sydney, Melbourne, Hobart and Canberra.
"While the increased caps mean that potential buyers can buy more homes than they could have under the old caps, they are still in most instances going to be targeting units as opposed to houses," he told ABC News.
"This will likely be the case in Sydney, Melbourne, Hobart and the ACT where the median value of a house remains above the 2022-23 new caps.
"Although, it should be noted that the increase in the caps is significant and means that in each of these cities there will be more houses eligible for purchase under this scheme than there were previously.
"It's a different story for other cities, given the new caps are above the current median value for houses in those areas. This indicates that more than half of the houses in those cities are now eligible for this scheme, along with many units."
Previous research from CoreLogic's Eliza Owen showed that, at the end of March, the old caps only allowed buyers to select from around 35 per cent of established dwellings nationally, and as few as 11 per cent in the ACT.
However, RateCity's research director Sally Tindall described the increase in thresholds as a "band-aid fix".
"Upping the property price caps might give first home buyers more choice in terms of homes to buy, but it will also encourage some to get into more debt, at a time when debt is about to become a lot more expensive," she cautioned.
Mr Kusher added that the expanded scheme might also put upward pressure on the lower end of the property market for any homes priced under the new caps.
"However, any inflationary pressures are likely to be offset by broader pressures that are likely to contribute to moderate price falls."
Save on rent, pay more interest
In her research from the end of March, Ms Owen noted that first home buyers on a middle income could cut the length of time they needed to save for a deposit on a typically priced Australian home from 8.8 to 2.3 years, while still avoiding lenders mortgage insurance (LMI).
"This could cut 6.5 years in the rental market, which at current weekly rent values on the median dwelling in Australia, equates to almost $160,000," she wrote.
However, while buyers may save "dead money" on rent, they will end up paying more "dead money" in interest to the bank because they will be taking out a larger loan.
"Taking the median dwelling value and the current average mortgage rate for principal and interest owner-occupier borrowers (2.44 per cent), the difference in interest costs between a 5 per cent deposit and a 20 per cent deposit is about $37,000 over the life of the loan," Ms Owen calculated.
"With the cash rate likely to rise sometime in the next 12 months, this will exacerbate interest [costs] between those on a 5 per cent and 20 per cent deposit loan."
In other words, the higher interest rates go, the harder that bigger mortgage will bite.
RateCity calculated the effect rising rates might have using Westpac's forecasts, which are fairly middle of the road among the major financial institutions.
For someone who bought an $800,000 home in Sydney or Melbourne with only a 5 per cent deposit, the predicted rise in rates by 2024 would see their monthly repayments climb by $539.
In cities where the scheme is capped at lower levels of $600,000-$700,000, the rise in monthly repayments would be $404 and $471 a month respectively.
Negative equity risk
Those buyers would potentially face a challenge not only from rising interest rates, but also the risk of negative equity, if Westpac's home price forecasts prove accurate.
"Encouraging people to buy at inflated prices with next-to-no buffer in the face of rising interest rates comes with some pretty serious risks," noted RateCity's research director Sally Tindall.
"Property prices are forecast to fall significantly in both Sydney and Melbourne over the next two years, so anyone buying with a 5 per cent deposit now, could find themselves owing the bank more than their property is worth by the end of 2024.
Any buyers unable to keep up with the higher repayments as rates rise could find themselves in negative equity and at risk of personal bankruptcy.
Using Westpac's property price forecasts, the purchaser of an $800,000 home in Sydney or Melbourne could see themselves owing the bank at least $50,000 more than their property is worth by the end of 2024.
Cameron Kusher said anyone considering taking up the scheme to buy with a small deposit should think carefully about these risks.
""Anyone looking to take up this scheme needs to be aware that we are coming off a period of very strong price increases driven by historic low interest rates," he said.
"While the scheme will help buyers move into home ownership sooner, they also need to be aware of the broader conditions whereby the cost of servicing a mortgage will be increasing and prices will potentially be falling."
Eliza Owen argues first home buyers should probably not be overly worried about the risk of owing the bank more than their property is worth, with the risk of losing their job and being unable to find another currently historically low.
"The risk of negative equity is mitigated by the fact that owner-occupiers hold their properties for long periods of time, and Australia's labour market is at its strongest level in 50 years," she noted.
"CoreLogic's resale analysis shows owner-occupiers have a median hold period of around nine years.
"Historic performance in the Australian housing market has shown peak-to-trough declines last an average of 12 months nationally."
In other words, like the Reserve Bank, Ms Owen believes the vast majority of people will be able to cope with higher mortgage repayments and few will default and be forced into selling for less than their purchase price.
However, Ms Tindall identifies another risk related to having negative, or even low, equity in your home.
"While the government has made it easier for first home buyers to get into the market under this scheme, getting out of the scheme won't be as easy," she said.
"Falling property prices have the capacity to blow this timeline to pieces and could see some first home buyers stuck in their property for a lot longer than planned."
