Mad ‘shared equity’ home ownership schemes make comeback

By Leith van Onselen

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:

  1. 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
  2. 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.

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Unconventional Economist

Comments

  1. “Treasurer Scott Morrison’s new found liking of shared equity schemes is hardly surprising”

    Its a little bit surprising, in that amounts to a degree of nationalization. However I am guessing there are some rent seeking interests who have a plan to “help” the government with its equity burden and privatize some of the public gains. That would be more fitting with the LNP ideology of state subsidized crony capitalism.

    • Or perhaps setting the public\up as the buyer of last resort at the top of the market is the intent? The equity can then be reprivatised following a housing market slump which leaves the government in enormous debt and desperate to sell down its assets.

    • Tassie TomMEMBER

      Michaelea Cash is a bit worried about her $1.4 million debt so she asked Scott nicely if he’d consider it.

  2. LabrynthMEMBER

    It is like the home safe solutions model. Will give you 15% of the value of your property today but will take 35% of the value of the property when you sell.

    This option also limits re-drawing on the loan as no bank will touch the property if one of those shared home schemes is registered on the title.

    Will the test still be that the owner has to live it for 6 months before they can move out and rent it?

    I can see a whole lot of agent/aggregator types coupled with big commissions pushing these products to accountants and mortgage brokers to swing their clients into OTP investments interstate.

  3. Qld Housing Commission used to have this for people on low incomes… you could buy your commission house from them 25% at a time. Payments were pegged at 25% of income. I don’t think that is what they have in mind, more like the sub-prime FHA loans in the US…..sign your 457’s living in the basement onto your mortgage.

  4. Ronin8317MEMBER

    I also fail to see why anyone will want to ‘invest’ in part of a house, as it has no income stream attached to it.
    A possible scheme is one where the private party owns the land, while the home buyer owns the house on top on a perpetual lease, paying rent every year.

    • ” as it has no income stream attached to it”

      Under the traditional models, the “investor” (really a bank) gets 200% of the growth in lieu of not getting rent. Under other models, the “investor” actually does get rent from the part-owner for the part they don’t own.

      • Ronin8317MEMBER

        Why would investor want to buy part of a house when they can buy the whole house? You can’t realize the capital gain directly, and the house owner still retains control over when to sell. Nobody is doing it right now because it’s not attractive financially.

      • It could easily draw the attention of a large industry fund who would be a long term holder of a a portfolio of this stuff and who otherwise has little direct exposure to the housing market plus they are attracted to the “social” aspects of the scheme.

    • in this case Reusa can let M Cash build a house on his land and instead of rent she will allow him 30min stroke.. might even take a photo for future MB articles.

  5. If the government shared in 99.9%, and the individual bought 0.1%, that’d be a fantastic solution.

  6. Erwin Schrödinger

    Its not about increasing housing affordability.

    Its about increasing mortgage sales.

    Bankers banquet.

  7. I think it has potential given one of the biggest issues around affordability (certainly that MB bangs on about) for current affordability which is FHB’s chasing their tails trying to get a deposit together in a rising market ie the right sort of demand side issue.

    At present, if you have part of of a deposit, there is no way to have it grow in alignment with the market). RP Data tried to do something like this a few years ago with an ASX listed note which linked to the RP Data index but couldn’t get it to work I think due to issues around scale, diversification and appropriate capitalisation of the entity taking the risk etc – all the sort of stuff that governments can actually do without needing to make a big profit.

      • Not really. Servicing loans at current rates (with a bit of rate rise buffer built in) is not that hardest part for FHBs – getting a deposit together is.

        Anyway, I reckon it is worth a pilot programme.

      • +1 The simplest proven definition of affordable housing is 3-4x HH income, and therefore prices here need to fall 50-70% nominal to achieve affordability- and that’s in the current economy, so adjust accordingly for wages/unemployment if/when TSHTF! Amazing to think prices could fall 70% and yet one cannot credibly call it a crash as it’s just come into line with fair value.

    • Part of the problem is people’s mis-understanding of the property market. They think:

      a) the property market will continue to rise (in real terms) in perpetuity (Wrong)
      b) the property market can sail away into the distance leaving all FHBs and currently ‘off’ the housing ladder effectively stranded (Wrong)

      FHBs actually hold the key to the solution here. Instead of chasing properties to ever higher levels (many with the help of mum & dad’ wealth), they could instead stand aside and allow market prices to adjust. Without FHBs (diminishing as they may be) this market falls heavily.

      • The Patrician

        “they could instead stand aside and allow market prices to adjust”
        Or they could keep getting sucked into the ponzi scheme by lowest interest rates in history and the shiny discounts, grants and concessions

      • @Pat
        Then you have to ask yourself how much sympathy to set aside for these people. Staggering that the authorities, aside from watching the lemmings heading for the cliff, are actively encouraging them. Good thing Canberra’s located where it is otherwise the pollies would have pitchforks in their not-too-distant futures

  8. the government has an endless stream of ‘tools’ it can use to keep the bubble afloat… even the mere mention of it by Morrison will cause prices to rise as people try to ‘get ahead of it’

  9. Don’t like shared equity home ownership for FHB’s, but happy to have reverse mortgages for retirees? Sounds like sauce for the goose.

    • ErmingtonPlumbingMEMBER

      That was my first thought,…like a reverse mortgage, no solution at all just a private sector opportunity to gouge.

      My 90 year old neighbour built the second house in our street (Patterson st) almost 70 years ago in the late 1940s and yet the lots in our street, all around 600m2, were sub-divided and for sale in 1922!.
      Old mate next door says he built our streetwas a dirt road , had no sewer, but had water and power.
      The owners of these cheap blocks had tgem set up as market gardens or horse padocks.
      Back then more land was rezoned and released than what could be absorbed by the market or full serviced by council and utility suppliers.
      This made home ownership affordable for Working class people who were prepared to live a little spartan for some time until the property prices and thus rates accorded better roads and services.
      Now days the state government and council require all this shit to be front end loaded, resulting in only large developer interests being successfull in getting new land rezoned and opened up,….but on their grubby and gready terms, like limited release, micro block sizes with eveless houses 1 meter apart from one and other.
      This Courpted relationship between developers and land release regulators is by far the main reason this bubble has grown so far out of controll.
      Cut immigration, raise Capital gains tax, piss off NG and the problem still will not be solved.
      Allowing all and sundry, unimpeded, to Flood supply will.

      • All part of this brave new world where personal endeavour is discouraged as individuals are over regulated while corporates are under-regulated. I built my first home myself over a year as when I had the readies and friendly trades to earn a spot of weekend money. Moved in before it was completed and took a couple of years to bring it up to scratch, but at least we had a roof over our heads. It couldn’t happen now given all the red tape and barriers that prevent people being their own agents for improving their personal circumstances. Owner builders find it difficult and even impossible to get finance, council approval or insurance because individual self improvement is depressed in favour of costly State controlled pathways. This has created barriers to people using the sweat on their brow to improve their lot in life. While some regulation is necessary, industries often game the regulatory environment to create barriers to entry and the building industry are guilty with the HIA lobby convincing all levels of Government the need for draconian regulation which protects their members. While plumbing and electrical are specific trades where safety and public health issues need to be regulated, general building is within the capacity of many people provided they have access to gaining approval subject to local government inspection. Because the Councils have minimised inspection, approval is difficult to acquire which is a barrier preventing owners undertaking general building work and this is actively supported by the FIRE industry because it provides a risk free opportunity for clipping. This reduces social mobility and creates a dependence on a self serving system which is largely contrived by the FIRE sector, vested interest industries and lazy governments. Exactly the same situation was contrived in the financial advice sector where the banks and major insurers convinced Governments that individuals were not smart enough to manage their own money or the tertiary qualified accountants were not skilled enough to deliver personal financial services compared to their planners, most of whom were trained over a four week course to sell the products of their employers rather than selling the client something they actually needed. Now you can’t do anything for yourself with your own investment money without having it signed off by some financial clipper. And they wonder why 10% of all super funds are SMSF’s?
        This world where Governments protect us from ourselves is a bloated and inefficient model of regulatory capture by vested interests. This is another reason why people can’t get ahead in life because Governments are in their way. And this is small government?

  10. adelaide_economistMEMBER

    As I noted on here in January when ScoMo visited the UK to holid…er, ‘investigate’ housing affordability:

    Yes – his ‘solution’ (if any) will be a variant of shared equity. Politicians don’t make these trips with such a clear announced focus without already knowing what they will say they ‘learned’ and the UK is the exemplar of shared equity schemes. We can also note it’s done nothing for housing affordability there.

    It’s sad that they are so predictably one-dimensional.

  11. Spot on Leith.
    This inflationary nonsense has to be called out quickly and clearly.
    It will law in 2 months

  12. Halve the value of the AUD and raise the minimum wage to $50/hour ($25/h in 2017 currency) while deflating the bubble.

    Bogans will say “great, I got this house for $400k and now sold it for $600k” even though the new $600k is the 2017 $300k 🙂

    After all, even in 2010 most voters thought that most immigrants come here by boat! They simply do not know maths!

    • drsmithyMEMBER

      They simply do not know maths!

      They’ll figure it out when all the clothes and electronics they buy off eBay “double” in price.

      Also, why would the wages of most people (who aren’t on minimum wage) go up ? It’s not like there’s any shortage of labour to drive wage inflation.

  13. What was the verdict on the UK Help to Buy Mortgage Guarantee, which ended last year, I think? Did this help matters or make them worse?

  14. Coalition Housing Affordability Policy
    How many ways can we dress up discredited First Home Buyer Grants as something else?

    • It does make me laugh that while the Coalition try to put lipstick on a pig pretending their stamp duty policy is something new, Labor just tries to re-sell the same pig without any effort at sexing it up

  15. Are you sceptical of low mortgage schemes offered by States as well? As far as I’ve read, those policies have functioned rather well at getting lower income people into the housing market, and it’d be a pity if they too run the risk of jacking house prices up even further than they already are

    • “it’d be a pity if they too run the risk of jacking house prices up even further than they already are”
      That’s exactly what they do, it’s not rocket science

      • Surely any scheme that assists people to buy homes (whether direct or indirect) increases demand and therefore house prices? I would think it’s a matter of supporting schemes that, while increasing demand, do so in as beneficial a way possible, or come hand-in-hand with other policies that temper the negative effects of any single scheme.

      • Read Leiths article.
        The problem is grossly overpriced houses
        The goal is reducing house price inflation, not increasing it.

      • Without economic collapse a substantial reduction in house prices is just not possible: no politician of any stripe–nor Leith surely–would ever propose we let the economy tank. With that card off the table there’s little we can do about current prices other than setting into motion reforms and schemes that blunt the stratospheric price rises we’ve seen since the early 2000s.

      • Adopt only those policies that do not increase the price of houses.
        There is alot we can do.

  16. Another reason the government will not allow prices to fall – it’ll erode their equity mate!

  17. The key sentence was “private equity should come to the table”.

    Government won’t pay if they can possibly avoid it.

    They’ll be looking for demand side solutions (to keep prices up and kick the can) without government spending if possible.

    Perhaps we should try and list all the stupid schemes they could come up with, or have come up with so far:

    Shared equity
    Accessing super for deposit
    Boomer bribe/ stamp duty concessions to move into smaller homes.

    Any others?

  18. Shared equity is fine if there are limits. Limit it to FHBs only, permanent residents only and only for PPOR. That would alleviate much of the burden for people who need housing the most, without collapsing prices for those that have worked hard to buy a home already.

    Another UK-idea is to have tax free savings accounts for FHBs to save a deposit. This seems like something we ought to be doing too.

    • Rudd and Swan introduced a First Home Savers Account where the govt kicked in some money if you put money into and the earnings were taxed at 15%.

      It had a miniscule take up so it was scrapped. Timing wise it was a little bit shit as the GFC was still being worked through and people were probably more worried about jobs than having to put money away.

      • darklydrawlMEMBER

        There were also a lot of rules and caveats around that scheme which didn’t make it that attractive to your average household vs putting your cash into a high interest savings account.

  19. “As I noted this morning, housing affordability can only be improved my implementing measures that either reduce demand or increase supply,…”

    Just keep it simple and say:
    housing affordability can only be improved by making housing cheaper!

    every measure introduced by the government is aimed at not impacting the price of housing whilst providing some sort of financial aid to those that need it (Eg: FHB’s)

  20. How about the govt give every FHBer a million dollars?
    That’ll make house more “affordable”.

  21. I am 100% on board with the view that Morrison is a stinking piece of dog sh#t, but I have to ask this: why would he do anything but continue to prop this whole mess up? I think that allowing access to super for deposits is a dead certainty, if not in this budget, certainly within this calendar year. They might soften it by saying that if you grab some of your super, you have to cop, say, an extra 0.1 – 0.25% or something out of your take home pay to go back into your super above the guarantee amount.

    Pure insanity, but it is definitely coming. Once it is in place, no Labor Govt will be able to touch it. At least it will make those fat arse non performing fee gouging super fund managers cry…

  22. Hey Leith, looking at your proposed reforms I am struck by one question – what are the discernible differences between supply and demand for housing as shelter, and supply and demand for housing as a financial asset? I expect these things become blurred for many buyers, particularly in the owner-occupier realm, but in Australia there is a growing need to distinguish between the two and I wonder if it’s worth drawing that into your conversations about supply and demand pressures?
    Cheers.

  23. The first test of any housing affordability scheme is that it not increase the price of houses.
    This “shared equity” scheme fails that test.
    Next.

    • Mining BoganMEMBER

      What? You want prices to stay the same or even fall?

      What the hell is that going to do for ‘affordability’ Australian style?

  24. tried and failed in the UK. Barely used in London as most houses/unit was over the cap. All it did was push up prices in outer city rings. Incentives and deal sweeteners like these are the last pathetic attempt to keep it all propped up.

  25. PantoneMEMBER

    Another scheme to take tax dollars from the renters and give them to the rentiers. Fuck this country.

  26. The Patrician

    FIRB approval for new builds only is an absolute no-brainer.
    How does approving sales of 10,000 existing dwellings per year to foreign nationals increase the housing supply?

    • LabrynthMEMBER

      Our politicans are true patriots, playing the long game, sacraficing their reputation for the good of the country.

      They are allowing the foreigners to buy the new dwellings because without them they won’t be built. The foreigners fund the projects and then later down the track, you increase the taxes on them to such a level they are forced to sell them to true blue Aussie battlers at a subsidized price.

      All in the name of doing it for the people of Australia.

      That has to be whats happening…….

  27. ScMo liked the idea if the other bit of equity was in private holdings because of the following. Say MrLandlord parasite owned the 25% equity bit in 4 of these dwellings which would be the financial equivalent of buying 1 dwelling to rent out. then the tenant would be fully responsible for
    All upkeep.
    Council rates
    Service charges if in a body corporate situation.
    This is how it works in London where he had his recent expensive tax payer paid holiday. In which case he has come up with a scheme/scam that is even better for his favourite (only) class of investors than they already had.

  28. Shared or partial ownership of a place to live is just the continued diminishing of the status of the individual or family unit. What they are saying is that the average person (except the wealthy and those who already own) is no longer worthy of owning a whole house. This is similar to making houses tiny and putting them on postage stamp plots. The final outcome of this devaluing of the individual, is that the individual can own nothing. It is feudalism making a comeback. Most people will be reduced to living on a basic UBI handout, owning nothing, counting for nothing, and with no cash and no security. In that precarious situation, it will be possible to destroy anyone who does not do as they are told. Blacklist them from renting. Cancel their electronic money. Turn off their internet.

    It is no use saying that “this can’t happen here”. Pretty soon it will be very possible that our rights could be severely compromised. If it can’t happen, then why are we seeing the early warning signs – like shared equity? The economy is supposedly going gangbusters – so why can’t we afford a whole shoddy substandard dwelling? How come people could own all of a better quality house in the past? It doesn’t really make sense.

  29. Don’t worry all these schemes are going to help lower the price by 40% in the great deleveraging