The government has pulled forward changes to the first-home buyer scheme. · Getty
Concerns have been raised about the impacts the upcoming expanded first-home buyers scheme could have on the property market. The new-look scheme was meant to be introduced on January 1, however the government revealed this week it would arrive three months earlier.
It’s now sparked fears that property and insurance prices could skyrocket as more people race to get their slice of the Australian dream. Anne Porter, head of product and data with proptech company Reapit, told Yahoo Finance that if history tells us anything, it’s that all the signs point to higher sale values in the coming months.
“There will be price rises because there’s already limited properties available and there’s going to be greater competition now,” she said.
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She said the First Home Buyer Grants (FHBG) that were introduced in 2000 led to an “astronomical” jump in prices.
The FHOG gave first-home buyers a $7,000 grant to purchase a new or existing home, and it wasn’t means-tested.
According to Deakin University, there was a median house price jump of $57,321 or 18.8 per cent while the FHOG policy operated.
However, Porter told Yahoo Finance that this increase largely happened just after the scheme was introduced, and then they “flattened out”.
Do you have a story? Email stew.perrie@yahooinc.com
She predicted prices wouldn’t rise as dramatically when the new scheme arrives on October 1, but it would still be a pronounced lift.
Treasury estimated there would only be a 0.5 per cent rise over six years directly attributed to the policy, but a Lateral Economics report prepared for the Insurance Council of Australia suggested it could be as much as a 6.6 per cent jump in just one year.
A 6 per cent increase could translate to an extra $90,000 for a Sydney home.
Prices could be fuelled by a triple whammy of the October scheme expansion, the third interest rate cut from the Reserve Bank taking effect, and spring being a typically busy time of year for property sales.
Queensland-based mortgage broker Cherisse Morgan said the scheme kicking into gear in just over one month will be a big win for first-home buyers.
But she told Yahoo Finance that it’ll be a “bittersweet” moment.
“I love that more people will have access to the scheme, especially the ones that were just priced out by a couple of grand, and they work really hard to afford a house,” she said.
Cherisse Morgan said the scheme’s expansion will be ‘bittersweet’ for first-home buyers. (Source: Supplied)
“But now everyone is going to be competing with a much bigger pool of people getting into the market with that scheme. So it’s kind of good and bad.”
Part of the scheme’s expansion will be abolishing the income caps.
These caps ensured that only people earning under $120,000 per year, if they were single, and $200,000 combined for a couple, would be able to access the scheme.
But now people with much higher incomes will be able to buy a property with just a 5 per cent deposit if they get approved, which will flood the market with more buyers at different price points.
According to Housing Australia, which runs the scheme, there are 33 lenders who participate in the 5 per cent deposit scheme.
These lenders will assess your eligibility and guide you through the application process.
But Aaron Scott, from real estate agent comparison service bRight Agent, warned that signing up for a mortgage with such a low deposit amount could mean “you’re unlikely to get the best interest rate deals”.
Yahoo Finance contributor David Koch echoed this concern.
“The lower the deposit you have, usually the higher interest rate you will pay,” the Compare the Market executive director told The Briefing Podcast.
“Yes, it looks attractive. Yes, it lets you get into the market. But cut your code according to your cloth and I think that’s the critical area.”
Scott added that a 5 per cent deposit can also mean your mortgage journey can be a tough start.
“Ask anyone and they’ll tell you that the first decade of paying off your mortgage the toughest,” he said.
“This period typically takes the smallest amount of principal off your loan, meaning that you’re paying a lot and not really getting ahead.
“A 95 per cent mortgage, however you cut it, is essentially just prolonging this difficult part of the cycle.”
When you apply for a 5 per cent deposit under the scheme, the government act as guarantor for the remaining 15 per cent.
This will mean purchasers will avoid paying Lenders Mortgage Insurance (LMI), which is typically applied to any application with less than a 20 per cent deposit.
If a homeowner on the scheme defaults on their repayments, the government could have to jump in to repay a part of the loan.
Treasury said the scheme will help people save $15,000 on LMI costs for a $500,000 home and $41,000 on a home worth $1 million.
In addition to the income caps being abolished, the property value caps will also be increased, depending on where it’s located.
State or territory
Area
Current price cap
New price cap
NSW
Sydney, Illawarra, Newcastle, and Lake Macquarie
$900,000
$1,500,000
Other
$750,000
$800,000
Victoria
Melbourne and Geelong
$800,000
$950,000
Other
$650,000
$650,000
Queensland
Brisbane, Gold Coast, and Sunshine Coast
$700,000
$1,000,000
Other
$550,000
$700,000
Western Australia
Perth
$600,000
$850,000
Other
$450,000
$600,000
South Australia
Adelaide
$600,000
$900,000
Other
$450,000
$500,000
Tasmania
Hobart
$600,000
$700,000
Other
$450,000
$550,000
ACT
$750,000
$1,000,000
NT
$600,000
$600,000
Jervis Bay Territory and Norfolk Island
$550,000
$550,000
Christmas Island and Cocos (Keeling) Islands
$400,000
$400,000
Treasury estimated it takes roughly seven years to save a 20 per cent deposit on a $500,000 home, and 13 years to save for a $1 million home.
But that number can be dramatically slashed to just two and three years, respectively, if you only need to save a 5 per cent deposit.
That would save a buyer $87,500 to $350,000 in money that would have otherwise been spent on rent.
While first-home buyers might be able to avoid paying LMI, the Insurance Council warned this 5 per cent deposit scheme could increase insurance costs elsewhere.
The Lateral Economics report said 30 per cent of the private LMI market, which is provided by insurers like Helia, QBE Insurance, and ANZ, could be wiped out as a result of the scheme.
Investors and first-home buyers getting homes above the caps could see an estimated 19 per cent increase in their LMI costs as a result.
“The risk is that it could affect the viability of some of these LMI providers, and they’ll try to recover that from other people who still rely on LMI,” the report’s co-author Gene Tunny said.
“It’s classic government crowding out of a private market.”
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