A lucky group of a few thousand homebuyers in NSW will, from January 1, get a hand from the federal government. But with Sydney house prices now starting to climb again, the initiative is unlikely to provide a long-term solution to the housing shortage. The new program will help a maximum of 10,000 first home buyers a year who cannot scrape together a deposit of at least 20 per cent of the value of their home.
It will provide free mortgage insurance which punters with small deposits are compelled to take out to cover the bank’s losses in case they default. The basic idea that people should be encouraged to get off the treadmill of renting and own their home is sound. Home ownership is the safest form of saving for a lifetime.
Yet government intervention to subsidise first-home buyers has a fraught history. People buying their first property already receive NSW government grants and stamp duty concessions but it is arguable that these subsidies, by fuelling demand, force already unaffordable house prices even higher. The conditions for this latest new deposit insurance scheme are fairly restrictive and it remains to be seen how many homebuyers it will practically benefit.
There are not too many houses close to the city priced under $700,000, which is the limit for the program in Sydney. Some financial counsellors are also concerned that the new program will encourage first-home buyers with no history of savings to take on excessive debt.
The government says it will guarantee the loans of buyers with deposits as low as 5 per cent of their homes. Yet, if people cannot demonstrate a strong savings history, they may also struggle to meet their regular repayments required to service a mortgage. Whatever the merits of the program, it will at most help about 10 per cent of first home buyers and its impact could soon be swamped by much bigger changes in the housing market.
After falling about 10 per cent between late 2018 and April of this year, house prices have recovered strongly in the past few months. In Sydney, they are now above where they started the year and some places have hit record levels.
The fall in house prices deterred investors seeking short-term gains and allowed some first home buyers in to fill the gap. Yet the Reserve Bank of Australia has slashed interest rates and it will not be long before investors return and inflate a speculative bubble. Some predict price gains of as much as 10 per cent this year, which would again push the dream of buying that first home out of reach for many.
The playing field remains tilted in favour of investors by the combination of negative gearing and capital gains tax concessions. The federal government should consider changing those distorting rules and also refocus housing policy on the most needy. The deposit guarantee scheme is open to singles earning up to $125,000 and couples earning as much as $200,000, which is above average.
If intervention is required in the market it should be in social housing for the very needy which can help break the cycle of homelessness. The only long-term answer to the high cost of housing is an increase in supply. Unfortunately, new home building has collapsed over the past year because of the fall in house prices. Buyers are also wary after the defects in developments such as Opal Towers. The NSW government needs to rebuild confidence in the system so developers can start building again.
- The Herald’s editor Lisa Davies writes a weekly newsletter exclusively for subscribers. To have it delivered to your inbox, please sign up here
Source: Thanks smh.com