First Home Buyer Deposit Scheme

The Problem with First Home Buyer Deposit Scheme

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While the First Home Buyer Deposit Scheme is without a doubt a big help for first home buyers struggling to rack up enough deposit for their dream homes, a hard look at it presents problems the core of which triggers unrest at the obvious lack of solutions to them.

For we can only hope it is the lack of concrete solutions the government is short with and not the lack of concern for the other Australians left out of the scheme or the general state of the real estate sector.

You’ve probably heard if you’re a first home buyer, that the budget presently is $500 million for 10,000 buyers distributed on a “first-come, first-served” basis.

The First Home Buyer Deposit Scheme

Under the first home buyer grant which will begin 1 January 2020, the $500 million will guarantee 10,000 first-home buyers per year, a chance to acquire their first homes with only a 5 per cent deposit.

The first home buyer deposit scheme essentially closes the gap between the 5 per cent that the scheme provides and the standard 20 per cent deposit that lenders required. The government will be paying for the difference, which actually covers the ‘lenders’ mortgage insurance’ designed to counter risks with buyers who have smaller deposits.

This means that you’ll still be paying for the loan as usual, but your mortgage—the remaining 95 per cent, will be bigger. If you buy a $700,000 property in Melbourne for example, your mortgage will be 95 per cent of that or $665,000.

But you must still earn less than $125,000 a year if you’re single or $200,000 a year for couple buyers to be able to take advantage of the first home buyer grant. And in Australia, only about one in ten earns more than that figure. That is a lot of buyers.

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In fact, there are about 110,000 first home buyers in the market each year. That’s 11 times the places available. Compare that figure with the 10,000 the government guarantees per year and you’ll see why most economists declare the 10,000 “is a drop in the ocean.”

And did you know that the price caps are nowhere near the median house values in major capital cities where most Australians live and work?

Check the price caps below.

First home buyer deposit grant

As you can see, there’s a limit of $700,000 for properties in New South Wales. No property in Sydney, Newcastle, Maitland or the Central Coast over $700,000 will qualify.

But the problem is not that there’s only going to be 10,000 Australians each year who will be able to avail of the first home buyer deposit scheme, nor that the cap is extremely limiting.

The problem is, there is more demand for housing than there is supply. The government could be exacerbating the housing affordability problems by increasing the demand in the form of the first home buyer deposit scheme and a lower deposit required, without a corresponding increase in the supply of housing thus pushing prices up and making it difficult for the rest of the population to actually own their homes.

Instead of coming up with a scheme, a solution or a program that will solve the housing supply problem that’s at the heart of housing affordability problems in Australia, the government fans the flame of demand.

For the 20 years we’ve had housing affordability problems, the government has responded by boosting demand instead of supply.

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But on a positive note, it’s now possible to break into the property market with just a 5 per cent deposit. And though the impact now may be minimal with only 10,000 grants per year, it may turn substantial in the future. The government did say they will adjust the scheme further after sufficient observation.

The first home buyer deposit scheme may also boost construction and with that, the housing supply crisis that influences housing affordability in the country.

We will just have to wait and see.

 

Ed Chan
Co-Founder / Non-Executive Chairman

 

P.S.

The key is to remain positive despite the bad numbers. Remember, great things happen to those who keep going.

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