Australia’s real estate treasurer, Scott Morrison, appears to have taken a liking to the ‘shared equity’ home ownership scheme announced by the Victorian Government, suggesting some similar scheme might be included in the upcoming Federal Budget under the cloak of ‘housing affordability’. From The Canberra Times:
Home buyers would only have to pay for 75 per cent of their total house price under a plan praised by Treasurer Scott Morrison less than eight weeks out from a federal budget designed to help ease Australia’s housing affordability crisis.
On Monday, Mr Morrison called the Victorian Labor government’s newly announced trial of a “shared ownership” model – where the government retains a 25 per cent stake in a newly purchased house – “very interesting”, but signalled he would prefer the private sector to stump up the initial investment.
Under the model, also known as a shared-equity arrangement, the private or public lender shares the profits when the home is ultimately sold. It is one of a suite of reforms introduced by the UK government, where the federal government is looking to for inspiration to tackle an endemic housing affordability crisis at home…
In 2003, Prime Minister Malcolm Turnbull praised the shared-equity approach… “By allowing homeowners to use equity as well as debt finance, homeowners will benefit from a lower cost of home ownership and institutions will be able to access an enormous, and uncorrelated, asset class”…
In 2008, Mr Morrison called on the Rudd government to increase lending to providers of shared-equity mortgages, but the federal government has not moved forward with the concept since it came to power.
I am not a fan of shared equity schemes for several reasons.
First, they are likely to increase housing demand and therefore prices (other things equal), thus becoming self-defeating from a housing affordability perspective. This is because:
- A new pool of lower income buyers that would not qualify for a conventional mortgage would suddenly be able to enter the market and bid up prices; and
- Buyers that do already qualify for, say, a $400,000 conventional mortgage may choose to take advantage of a shared equity scheme so that they can purchase a more expensive home than they could otherwise afford.
Thus, shared equity arrangements would further fuel price rises in the housing market, resulting in further reductions in home affordability.
Another important drawback is that private sector proposals for shared equity arrangements are likely to involve the equity provider sharing a disproportionately high share of any capital gains, and a disproportionately low share of capital losses (if any).
Thus, such shared equity schemes will at best erode the value of the home as a store of household wealth, and at worst in a declining market increase the likelihood of home owners holding significant negative equity in their home.
Indeed, The Australian’s Judith Sloan made this exact point today:
[Shared equity] types of arrangements have a habit of going badly wrong, with issues arising from mortgage defaults and the division of capital gains. One such scheme in South Australia ended up being a worse deal for low-income home purchasers relative to those purchasers taking out a traditional bank home loan.
Treasurer Scott Morrison’s new found liking of shared equity schemes is hardly surprising, given they offer politicians the avenue of providing the impression that they are doing something to help first home buyers, while really only further juicing demand and inflating home prices.
But the truth is that housing affordability cannot be improved by pumping yet more buyers and credit into the system.
As I noted this morning, housing affordability can only be improved my implementing measures that either reduce demand or increase supply, including:
- Slashing immigration to sensible and sustainable levels [reduces demand];
- Undertaking tax reforms like unwinding negative gearing and the CGT discount [reduces speculative demand];
- Tightening rules and enforcement on foreign ownership [reduces foreign demand];
- Extending anti-money laundering rules to real estate gatekeepers [reduces foreign demand]; and
- Providing the states with incentive payments to:
- undertake land-use and planning reforms [boosts supply];
- swap stamp duties for land taxes [boosts effective supply]; and
- reform rental tenancy laws to give greater security of tenure [reduces demand for home ownership].
Of course, reforms in the above areas also means that house prices would necessarily fall (other things equal). And no politician wants that.