While the government’s latest federal budget announcement has been welcomed by many due to its aim to boost home ownership through financial assistance, an improvement to housing affordability could turn out to be a double-edged sword, new analysis has warned.
Where the Labor Party aimed to decrease housing demand from 2016 to 2018 by reducing incentives for housing investors, the current federal government haste in the total opposite direction — aiming to increase home ownership instead by implementing schemes that improve mortgage accessibility, thus reducing the risk of downward pressure on residential property prices.
The First Home Loan Deposit Scheme (FHLDS), first home buyers grant and HomeBuilder are some of the earlier examples of this strategy — all of which are believed to have contributed to the high level of activity for first home buyers over the past 18 months.
This strategy has been highlighted further in the 2021–22 federal budget, where assistance has been extended to single-parent households and those first home buyers looking to purchase or build brand-new homes.
While the recent budgetary measures have been a welcome development for aspiring home owners, CoreLogic head of research Eliza Owen said that improving affordability may not be beneficial for everyone.
“Housing affordability is becoming an increasing concern for first home buyers and policymakers amid recent rapid price increases in housing values,” she said.
“But the double-edged sword of reducing housing values to make them more affordable is that housing also makes up the majority of Australian household wealth; make housing more affordable for one Australian, and we risk reducing the wealth for another.”
Ms Owen laid out the major schemes outlined in the federal budget and noted their possible implications for the housing market:
1. Family Home Guarantee
Why it’s good: Under this policy, 10,000 eligible single parents will be able to purchase a property with only a 2 per cent deposit, whether they are first home buyers or previous owner-occupiers. Based on a typical entry-level Australian dwelling value ($431,194), this could reduce a deposit requirement from around $86,000 to $8,600 and narrow the gender wealth gap, as most single-parent households are largely headed by women.
Why it’s risky: “Low deposits mean more debt, and more debt means more interest needs to be paid over the life of a loan,” according to Ms Owen.
Based on a $431,194 property, a 20 per cent deposit home loan at a 2.4 per cent interest rate would accrue around $121,000 in interest over 25 years with monthly repayments. In comparison, a 2 per cent deposit home loan could accrue $145,000 in interest, she explained.
She said: “Taking on more debt may still be worthwhile if the borrower is otherwise spending tens of thousands of dollars each year on rent. Even more beneficial could be the long-term gains in real asset values that come from accessing ownership earlier with a lower deposit, which could be another factor helping to outweigh the additional interest paid.”
2. First Home Loan Deposit Scheme extension for new homes
Why it’s good: Following the popularity of the first round of FHLDS among first home buyers when it was introduced in the beginning of 2020, the government will add 10,000 places for new dwelling purchases this year. Rebranded as “New Home Guarantee” in the federal budget, this scheme is expected to provide easier access to home ownership and boost economic activity in the construction sector, as well as protect the established housing market from price increases as demand is funneled into new builds.
Why it’s risky: As demand for new builds increases, the cost of construction could also go higher, mainly due to increased supply chain costs and labour shortages, Ms Owen warned.
She said: “As dwelling approvals and commencements surge off the back of HomeBuilder, it is possible that the purchase and construction of new homes could actually become more expensive for first home buyers in the short term.
“With international border closures expected to remain well into next year, the first half of 2022 may see a slowdown in construction activity as new builds are delivered.”
3. Expansion of eligibility age for downsizer contribution
Why it’s good: Previously available for Australians 65 years and older, the downsizer contribution will now be available to access for those 60 and older starting July 2022. This will allow more of the older population to make a tax-free contribution to their super of up to $300,000 (each) from the proceeds of selling their home, without being counted towards the contribution cap. By incentivising home sales sooner, more established housing could be freed up, ultimately helping to rebalance demand and supply.
Why it’s risky: With more than a year left before the measure comes into effect, downsizers looking to benefit from the scheme will still have to wait to sell up, which could ultimately impact the housing market, Ms Owen said.
“It is also worth noting that in the almost three years since the scheme was implemented, only around 22,000 individuals have accessed it, so this may not add materially to supply,” she conceded.
All in all, while the federal government’s latest budget approaches housing affordability to make property more accessible, demand-side grants, low deposit loans and increased saving measures do not really alter the fundamentals of the housing system, according to Ms Owen.
“Rather, it increases participation in an existing framework,” the researcher concluded.