Is FHLDS expansion a good idea? Eliza Owen on the ‘complex question’

“Whether the scheme is ‘good’ or ‘bad’ is a really complex question,” Ms Owen said following the 2022 budget release outlining an increase of 50,000 new low-deposit guarantees across the government’s Home Guarantee package in the months ahead, with 35,000 offered under the FHLDS.

“Home ownership in Australia is embedded in wealth accumulation, security of tenure and security in retirement. In other words, home ownership in Australia makes life a lot easier in the long run than renting,” she said.

From the perspective of those looking to get a foothold on the property ladder, as well as the industry professionals who will handle the business of these buyers, it’s easy to see why the news has met with positive feedback.

But the economic factors that could be swayed by an influx of buyers always need to be carefully weighed to ensure the stability of the sector – and ultimately its affordability for new entrants – long term.

According to Ms Owen, these are some of the positive and negative impacts associated with the scheme:

Pros:

• It (roughly) quarters the time it would take to save a deposit

The median dwelling value across Australia at the end of February is $728,034, according to CoreLogic. Saving for a 20 per cent deposit on a home of this value would take the average Aussie 8.8 years, whereas a 5 per cent deposit could be acquired in as little as 2.3 years.

“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,” Ms Owen reported.

• More than one in three established properties (currently) qualify

“Based on the scheme’s current price caps for established properties, CoreLogic estimates around 35.4 per cent of Australian dwellings qualify,” Ms Owen said. 

It’s a healthy percentage, but this figure is entirely reliant on how the market performs in the months ahead.

“If prices decline, this could free up more dwellings for applicants, while the reverse is true if prices continue to rise,” she noted.

If elected, the Labor government has committed to reviewing the price caps, which vary from state to state and between metropolitan and regional areas, on a six-month basis.

• It’s pragmatic 

“The FHLDS is not revolutionary,” Ms Owen stated plainly, noting that previous proposals, now dead in the water, had been floated to address rapidly escalating property prices.

“Where the 2016 and 2019 federal elections saw Labor campaign on changes to negative gearing and capital gains concessions, both parties are trying to assist first homebuyers in getting over the deposit hurdle, ‘while protecting the value of homes’”.

The wide take-up of the scheme, however, has shown that buyers find it to be a worthwhile avenue.

“To-date, the scheme has seen very high demand. Within four months of commencement, more than 8,000 places in the scheme had been taken up. ABS data also shows first homebuyer loans surged from the start of 2020, coinciding with the start of the scheme,” the economist said.

Cons:

• Interest costs would be higher

“Understanding the concept of interest is crucial [in doing] a thorough cost-benefit analysis of the scheme,” Ms Owen commented.

What many borrowers might not realise is that the difference in interest costs between a 5 per cent deposit and a 20 per cent deposit, on the average house price of $728,034, is about $37,000 over the life of the loan.

This number will inflate as the cash rate rises, and Ms Owen noted that it’s important for borrowers to be aware of their overall costs when taking on large mortgages.

She acknowledged, however, that while “the interest costs on a 5 per cent deposit home loan may be larger, it is important to weight them against the cost of not being in the market”.

• Price thresholds are hard to determine

As noted above, 35.4 per cent of Australian houses would currently qualify for purchase under the scheme, but within a fluctuating market, this number can change dramatically, and it’s difficult to determine fair price caps for different markets.

As it now stands, only around 10.7 per cent of properties in the ACT currently qualify, while 66.3 per cent of dwellings in Perth could be bought by buyers under the scheme.

• It could do better on the equity front

“The income thresholds for the FHLDS are relatively high,” Ms Owen noted.

The scheme currently supports couples earning up to $200,000 annually or singles on a $125,000 salary.

But Ms Owen pointed to a Grattan study that revealed lower rates of home ownership are associated with lower income, and so programs addressing low rates of home ownership must really focus on lower-income households.

The scheme’s current caps mean that it’s open to couples earning in the top 20 per cent of incomes. That being said, take-up is highest within the $60-$80,000 bracket for singles and $100-$125,000 for couples.

Commenting on both parties’ housing strategies at large, however, Ms Owen opined that more needed to be done to support lower-income Australian residents to secure stable housing.

“Regardless of which political party wins … an objective of housing policy should also focus on more equitable housing outcomes across income brackets, including adequate provision of affordable housing for those who are unlikely to achieve home ownership,” she said.

Pro and Con:

•  It will increase housing demand at a time when the housing market is cooling

Historical evidence shows that schemes like the FHLDS will incentivise buyers, as it did in 2008, giving the Australian economy a needed boost in the midst of the global financial crisis.

The picture in 2022, however, is quite different.

“Expanding the FHLDS could increase first homebuyer numbers at a time when the housing market outlook is uncertain,” the economist said. “Alternatively this could increase demand for more affordable properties, increasing prices in this segment”.