ScoMo’s FHB guarantee readies wave of subprime patsies

Via the ABC:

A $500-million scheme will help 10,000 first-home buyers get into the market with a smaller deposit than they would otherwise need.

Prime Minister Scott Morrison promised before the election it would be people’s “first leg on the first rung of the ladder”.

Then, housing and economic experts were dubious. Now, with more detail released, they’re fairly certain: it won’t work.

“Ultimately, it’s going to be pretty ineffective,” Brendan Coates, household finances program director at think tank the Grattan Institute, told The Business.

“It’s only 10,000 [loan] guarantees a year, so that’s a drop in the ocean really, compared to the problems of housing affordability for younger, poorer Australians,” he said.

Lenders generally insist on 20 per cent and charge what is called ‘lender’s mortgage insurance’ to cover the risk of buyers who have smaller deposits.

Under the scheme, taxpayers will underwrite the ‘gap’ by paying the lender’s mortgage insurance.

“It’s essentially a lottery for those that do get access to this scheme,” Mr Coates added.

“Because it allows them to borrow more without having to pay lenders mortgage insurance — saving them up to $10,000 — so it’s likely to be much more demand for the scheme than the 10,000 places that are available.”

But the ‘catches’ of the scheme keep racking up.

  • There are around 110,000 first home buyers in the market each year: 11 times the places available. The grants will begin 1 January 2020 on a “first come, first served” basis, preferencing those who have a deal ready to go and are skilled in form-filling.
  • You must earn less than $125,000 a year for singles, or $200,000 a year for couples. Only about one in 10 people in Australia earn more than that, so it’s not exactly targeted at poorer people.
  • You still have to pay back the loan as normal, but it’s bigger. The scheme could see you put down a deposit of $35,000 for a $700,000 property in Sydney. This means your mortgage would be for 95 per cent of the purchase price, or $665,000.
  • The price ‘caps’ for properties you can buy under the scheme don’t go near the median house prices in the major capital cities, where most people live and work.

“My over-riding fear is that this is a band-aid, for a very big problem we have with housing affordability,” Nicki Hutley, from Deloitte Access Economics, said.

One of Australia’s foremost economists, Ms Hutley said schemes like this have worked in some instances, such as the Indigenous community, but they can put people into dire situations.

“It’s a big risk to taxpayers and this is why lender’s mortgage insurance exists for standard mortgages, and it’s also why most of the banks require a 20 per cent deposit,” she said.

But the larger issue is the scheme essentially blesses 95 per cent home loans for people on lower incomes, and lender’s mortgage insurance protects the bank — not the home owner

Regulators have recently loosened the ‘stress test’ that checked how well people could service loans if rates rose, to get credit flowing.

That change, coupled with this scheme and low interest rates, could build huge loans that create problems for stretched borrowers. Australia has always been careful in this field, she added, for solid reasons.

“That prudence that we’ve had has held us in good stead. We don’t want to do anything that undermines that strength that we have in our banking system — from both a macro perspective for the economy as a whole, but also to protect individuals,” she said.

Less than median house prices

The scheme seems tailor-made for people struggling to scrape together the large deposit needed to enter the market. But it severely restricts where and what they can buy.

A price cap exists for the different areas, particularly capitals and large regional centres where more than 250,000 people live.

No property in Sydney, Newcastle, Lake Macquarie or the Illawarra (Wollongong) over $700,000 will qualify. Nothing in Melbourne or Geelong over $600,000 fits either.

If you want to live in Brisbane, the Gold Coast or the Sunshine Coast a $475,000 limit applies.

Scheme’s property price caps:

State/territory Capital city and regional centres Rest of state
NSW $700,000 $450,000
VIC $600,000 $375,000
QLD $475,000 $400,000
WA $400,000 $300,000
SA $400,000 $250,000
TAS $400,000 $300,000
ACT $500,000
NT $375,000

“This is a small scheme that will not really counteract the inflationary impact of what they’re doing in tax policy,” Kate Colvin, spokesperson for affordable housing lobby group Everybody’s Home, said.

The key tax policies in question are negative gearing and capital gains concessions.

Negative gearing occurs when landlords make less money from rent than they spend on the property (such as paying the mortgage). This reduces their taxable income (by billions).

A capital gain occurs when a person makes a profit by selling an asset like shares or a property.

Since 1999, 50 per cent of the capital gain on most assets held by someone for more than a year is not subject to capital gains tax. Because that’s a lower rate than is levied on wages or interest, it’s been criticised as overly generous.

According to Treasury data, the lost revenue has risen quickly, from $6.3 billion in 2014-15 to an expected $9.4 billion in 2018-19.

“The Federal Government puts $12 billion in the pockets of investors for negative gearing and capital gains tax exemptions each year, and that means investors can outbid home buyers at auctions,” Ms Colvin said.

“This scheme will make it a little it easier for homebuyers to bring forward a purchase if they’ve already saved for a deposit, but the real problem that they face as the cost of the home that they’re buying”.

Despite recent falls, Australia’s housing remains some of the most unaffordable in the world.

In a statement, Treasurer Josh Frydenberg said the First Home Loan Deposit Scheme added to initiatives that allow first home buyers to build their deposit through voluntary contributions to their super fund, and the release of Commonwealth land for development.

Mr Coates said limiting the scheme to just 10,000 applications means it won’t make a difference. But expanding it could be counter-productive.

“We know from experience when states have implemented these kind of schemes before, that they’ve really pushed up prices at the bottom end. So first-time buyers are competing for a limited number of homes,” he said.

“This scheme has a certain seductive appeal. It sounds like it’s going to help first-home buyers … when really it’s not going to make much difference”.

This. It will be expanded and will push up low end prices instantly which is what it is designed to do, of course.

It’s got nothing whatsoever to do with affordability. It’s about supporting the PM’s Property Council mates with another short term kick ‘o’ the can.

A new wave of government-sponsored sub-prime FHBs pouring into the property market with 5% deposits would be a bad idea at the best of times. To do it just as the Australian economy’s endless income reckoning deepens into the structural slowing of Chinese growth is downright barmy.

It has negative equity disaster written all over it. With the Commonwealth liable.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. so basically to lure young people into dodgy crumbling dogboxes that will make them bankrupt soon
    700k in Sydney buys just that

    • SoMPLSBoyMEMBER

      Already the clubhouse leader for ER visits, property ‘ladders’ are the perfect metaphor for what’s in store for these folks.
      “New research by the Australian Institute of Health and Welfare has found falls from ladders were the most frequent “Do-It-Yourself” injury during 2013-2014, with nearly 1 in 10 resulting in an “intracranial injury such as a concussion”.

      https://www.macrobusiness.com.au/2019/10/ponzi-borrowers-cry-poor-on-interest-only-reset/

      • as repayments are becoming much bigger issue this needs to be combined with 100 years loans otherwise repayments on these loans are going to be $35k per year
        also first time investors need to be included

        • Professor DemographyMEMBER

          This is correct. Some things we will see in the medium term are:
          > access to portion of Super for deposits – not just under the savings scheme
          > 50 year mortgages or some form of shared equity mortgages
          > new visa classes for international investors or migrant buyers
          > new grants for first time investors

  2. People still have to get the loan. Having the deposit is irrelevant and changes nothing on the credit saturation problem.

  3. SnappedUpSavvyMEMBER

    why young Australians would want to live in a now totally foreign and over priced shythole like Sydney is hard to imagine to begin with

    • I came to the conclusion a while back that Sydney wasn’t worth it. Mind you Melbourne ain’t far behind, but it’s still a bit better than being stuck in over crowded and over expensive Sydney.

      • That is why I capitulated last year and bough on the central coast, commute sucks but the not having a massive loan and not being in shitney is worth it.

    • Cos when the great and powerful cultural and societal changes are complete and the clear coat has been polished, it will be the envy of the galaxy and every property owner will be wealthy beyond all expectation?

  4. Cannon fodder for the developers. Meat shields for the rent seeker. Hosts for the parasite economy to feed on.

    Aussie! Aussie! Aussie!!! (There is no saving you.)

  5. Good to see the government has finally acted on those banking RC findings…….
    they did say we need more lending to people on low incomes with 5% deposit right?

  6. In places in Brisbane with the highest demand $475k will only buy you a 1 bed apartment. Coincidence? Developer mates ScoMo?

  7. billriskasMEMBER

    What I do not understand is the opportunity cost factor. If everyone is paying the banks back who is supporting the broader economy with general expenditure on goods and services, the tradies???

    • For every buyer there is a seller.
      Every time someone sells a house for more than the owe on it a whole new chunk of money goes into the economy.
      So as long as the new money from loans is bigger than the interest payments back to the bank it’s party time.
      If the new loans are smaller than the interest then the economy will be shrinking. 🙁
      This is why absolutely everything will be thrown at house prices to keep them increasing.

      • Jumping jack flash

        Yes!
        Using a larger lump of debt to repay the interest on the previous lump.
        Pure genius!

        That’s got to be a sustainable model. For certain.
        Hmm.. I’ll just take my maxed credit card and balance transfer to another and then.. oops.. maxed it out..

        No worries mate. Next credit card… balance transfer…. whoops, did it again..

        this can keep going forever, right?

        • Maybe?
          Depends on how badly the people in control want it to.
          Good idea? probably not.
          But pulling the pin on it is massively bad news so who wants to be the guy remembered for that.

          Plenty of people will continue to roll over credit cards rather than declare bankruptcy to use your analogy.

  8. Jumping jack flash

    Woohoo! More debt for the economy!

    It was looking a bit thin on the ground! This should surely boost the amount of debt, and more debt means a better economy in the new world.

    We’re getting on track for that extra 7 trillion debt dollars by 2030 to turn this frowning economy upside down! It’ll be 2006 all over again. Good times! Good times!

    The economy is saved!!

    But most importantly, due to all the extra debt that will be magicked into existence and attached to houses, wage rises will surely, finally, be flooding in.

    They’ve finally cracked the code and turned debt and it’s interest repayment into positive economic growth. Not negative. Debt is now a giver, not a taker. All it took was a FHB grant. Imagine that! So easy.

    Keep holding your breaths everyone, and keep taking on that debt.

    • SoMPLSBoyMEMBER

      Lol!
      Hopefully, for my someday (here’s hoping) grand kids, I’m now going to get them in line for the MCG membership, the Haileybury K-12 and the best home loan package available ‘when that day comes’.
      It’s not who you know; or what you know; but having the ‘right’ credit facility is how you succeed in Straya.

  9. Add to the list of big winners, Slater and Gordon, Maurice Blackburn, and Redlich to name but a few who will punish any lender so foolish as to stray from forseeable and repayable.

  10. And the policy they modeled this from, keystart in WA has been an absolute disaster for those that fell for it. It’s leaving people with negative equity on high interest loans unable to be rolled over. 5% equity is a disaster waiting to happen, especially those on low wages. The government is more than happy to feed young australians into the mincer that is the Australian banking/property sector.

  11. Even the horribly depressed Darwin market is starting to show signs of life

    The zombie is rising.