Advice for first-home buyers: ‘Don’t bother’
The Federal Government's most anticipated election commitment has been labelled a dud months before it begins, with one expert advising those meant to benefit to not even bother.
From January 1, a new scheme will allow 10,000 eligible home buyers to get into their first property with a 5 per cent deposit thanks to the Government guaranteeing their mortgages.
But ceilings set on purchase prices in Sydney and Melbourne well below the medians have raised concerns that it'll shut out many.
"What I'm scratching my head about is that the scheme was clearly well-intentioned, with Sydney and Melbourne would-be property owners top of mind because of the high property prices in both cities," Zippy Financial director and principal broker Louisa Sanghera said.
"Yet, now the price caps have been set so ridiculously low in these capital cities, most buyers won't qualify anyway or, worse still, will end up buying a cheap and inferior property, which may cost them far more in the long run."
The Government has set a purchase price cap in Melbourne of $600,000, where the median home price is currently $720,000, and in Sydney of $700,000, where the median is $920,000.
"The price caps have been set well below the median house prices in both Sydney and Melbourne, with the median unit price in Sydney even above the maximum price allowed under the scheme," Ms Sanghera said.
House prices have been rising sharply for four months now, which could mean the window of opportunity for first-home buyers is rapidly close.
As a result, by January when the scheme kicks off, those ceilings on purchase prices in Sydney and Melbourne would be even more inadequate, Ms Sanghera said.
She also criticised the scheme's limit of just 10,000 participants, saying it's likely to be exhausted just as it begins.
"To put this in perspective, there were just shy of 10,000 first-home buyers in September, according to the Australian Bureau of Statics, so the scheme could be here one month, gone the next, from the start of next year," she said.
For those reasons, Ms Sanghera said her advice to hopeful first-timers when it comes to the Government's new scheme is: "Don't bother."
Gault & Co Property Advisory director Ramon Mitchell said the scheme looked promising "at first glance" but had several flaws when more closely scrutinised.
"It's unlikely there will be any wholesale benefit to the wider first-home buyer pool," Mr Mitchell said. "The scheme is limited to about one-in-10 first-home buyers each year.
"The scheme also appears to be accessible for the majority of income earners below the top bracket, which means many of those eligible to access it probably don't really need it."
Mr Mitchell believes the Government could tighten the qualification requirements to ensure the scheme is used by those who need it the most.
But those aren't the only issues, he believes.
"This scheme does nothing to address the key underlying issue of supply shortage. It's all good and well to make it easier for that select 10 per cent of buyers to get a loan, but if they either can't find anything to buy or are pushed by competition to pay more, it's hardly a great help," Mr Mitchell said.
Some banks have indicated they will charge a higher interest rate to recipients of the Government's scheme to offset a perceived risk.
This showed that lenders didn't understand how the policy worked, Mr Mitchell said.
The Government guaranteeing a loan limited any exposure and so there was no need to charge more, he said.
"The problem is the amount the buyer saves on not having to come up with the full deposit and lenders' mortgage insurance fees is now outweighed by the higher interest they'll pay over the lifetime of the loan with the increased 'risk surcharge' built into their rate."
It's a concern shared by Labor's spokesman for housing Jason Clare who described banks charging higher fees as "worrying".
"If this happens it will defeat the whole purpose of the scheme," Mr Clare told news.com.au.
"You might save money when you sign up for the mortgage, but you will have to pay more in the long run.
"The Government needs to knock this on the head now and ban the banks that are part of this from charging higher interest rates."
First-home buyer activity in August hit its highest level since 2012, comprising 29.8 per cent of all owner-occupier purchases - well above the decade average of 25 per cent.
The result was attributed to less competition and more affordable prices following almost 18 months of median house value declines, particularly in Sydney and Melbourne.
But that downturn is now over, with consecutive month-on-month price growth recorded both on a national average front, and in the biggest housing markets, since June.
ANZ senior economist Felicity Emmett said affordability peaked then and prices are set to reach "record highs" in the first half of 2020 if current trends continue.
"June 2019 marked a turning point as dwelling values again began to outpace household incomes across capital cities, with the exception of Perth and Darwin," Ms Emmett said.
"The rebound in prices is being driven by a number of factors including record low interest rates, easier access to credit and more certainty around tax arrangements."
Just as first-time buyers were beginning to find their feet after several years of boom conditions, it seems they're about to be largely outmuscled once again.
CoreLogic head of research Tim Lawless said median house prices in Melbourne had soared by 6 per cent since May, while they're now up 5.3 per cent in Sydney.
"However, there is still some good news for prospective buyers and renters," Mr Lawless said.
"The research shows households are now dedicating the smallest proportion of their incomes towards paying a new mortgage since early 2004, and renters are spending the lowest proportion of their income on accommodation since 2007.
"This year, we have also seen an increase in the number of areas where it is cheaper to buy than rent, which can be attributed to the lowest interest rates since the 1950s together with lower housing prices relative to the market peak."