Why ScoMo’s first home buyer subsidy scheme will fail

By Eliza Owen – CoreLogic head of residential research Australia

The first home loan deposit scheme has an accessibility problem

The first home loan deposit scheme (FHLDS) commenced 1st of January 2020. It is a leg-up over the deposit hurdle for first home buyers (FHB) struggling to accumulate a sizeable deposit, providing eligible Australians the opportunity to buy their first home with a deposit as low as 5% of the purchase price.

A government guaranteed loan means that borrowers could secure a mortgage relatively quickly with a low deposit, and without paying lenders mortgage insurance (LMI).

The consensus is that helping FHBs overcome a large deposit hurdle does not address affordability, because it ignores the root causes that make that hurdle so high in the first place.

In addition, the FHLDS may present a further issue of accessibility in the form of the income thresholds for eligibility.

The income limit on the scheme is strangely high

To be eligible for the FHLDS, individuals must earn a before-tax income of less than $125,000 per annum. Couples must earn less than $200,000.

If these income thresholds seem high, it is because they are.

An individual on $125,000 a year sits above the 80th percentile of full-time working wage earners in Australia.

In other words, a wage of $125,000 is in the top 20% of full-time workers. The median pre-tax income for an individual in Australia is about $78,000.

Under the FHLDS, high income earners are being offered the same advantage as lower-income earners.

The scheme may actually provide more advantage to those earning towards the top of the threshold. That is because they can save a 5% deposit more quickly, and the scheme is currently limited to 10,000 guarantees a year, awarded on a ‘first in, first served’ basis. The advantage high-income earners have in this scenario is demonstrated in the figure below.

This analysis shows the amount of time needed to save a 5 per cent deposit based on different income levels. It is based on a median-value dwelling in Australia at December 2019 ($540,974). It assumes a savings rate of 20% of after-tax income, in a savings account with a deposit rate of 1.5% per annum.

With an income of $125,000, it takes 1-and-a-half years to save a 5% deposit. A median earner ($78,000), takes 2 years and 3 months. A relatively low-income earner ($48,100) may take over 3 years.

In reality, the savings rate is unlikely to be constant across all income levels. With the national household savings rate at 4.8%, it may not be realistic that all hopeful FHBs can save 20% of disposable income, especially if they are also paying rent. These savings periods will also be affected by changes in the median dwelling value, which is not taken into account here.

This analysis looks at a median value dwelling for all three income levels. In reality, the value of dwellings purchased would be adjusted for the income level, so the scheme would make it easier for low income households to access lower value properties.

But this does not address issues such as spatial inequality, where lower income households find it harder to buy closer to employment centres, or in more ‘liveable’ area.

It’s also worth noting that a 5% deposit loan is more expensive in terms of interest repayments, due to the higher principal amount, which low income earners may struggle to service.

Working for individuals, not broader housing accessibility

The FHLDS could be useful to those who can access it, even though a mortgage with a deposit of 5% costs more in interest than a 20% loan.

That higher interest cost could be less than what is spent on rent during the time taken to save.

Paying more interest on a low deposit loan also makes sense if property values are going up. By accessing a property sooner, the asset has longer to accumulate capital growth that may outweigh the higher level of interest paid.

But introducing a high income threshold, for a program with limited numbers, could make it more regressive. 10,000 guarantees represents a small portion of FHB demand, where 10,857 new FHB loan commitments were made in October alone.

Importantly, lower income households are less likely to own a home than high income earners. Ownership rates in the highest gross income quintile of households was over 80% in 2013, compared with about 55% amid the lowest quintile. Improving home ownership in Australia may need more progressive policy.

The FHLDS, in its current state, risks awarding home ownership to those who may have otherwise attained it with time.

Leith van Onselen
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    • That’s a good point. If the purpose of the scheme is to help out aspiring FHBs then it certainly will fail. If it is to help put a floor under the new apartment market then it may have limited success.

    • Did anyone outside of the media actually believe the scheme would help anybody in the FHB cohort? Because if the quality of journalism is such that they don’t see this for what it is, I’m somewhat ashamed. The fact that nobody stated this obvious fact during the election when it was announced is also concerning. The fact that Labor jumped onboard this brain fart also is 1 reason I didn’t want to vote for them.

    • +1 Don’t understand where the fail is either. Isnt it doing exactly what it’s supposed to? Bringing forward demand from the cohort that would have added to the demand in due time???

  1. “it ignores the root causes that make that hurdle so high in the first place”

    The prices are too high in the first place. The root cause as has been discussed on these pages for years is a lack of supply and continued above average population growth mostly from immigration thrown at it. Nice how she conveniently omits mentioning what the root cause is!

    • Jumping jack flash

      “The prices are too high in the first place”
      No, prices are fine! The prices are irrelevant when viewed under the lens that anything is “affordable” if there is enough debt available, taken on by the buyer, and handed over to the seller. Repayments are low thanks to interest rate manipulation. The amount of debt that can be obtained on even a modest income is insanely high.

      What is too high are the deposit requirements. 5% is simply unattainable as prices continue to increase.
      5% of 10million – which will eventually be required for a dilapidated “starter house” in any capital city within the next 30 years – will be 500K. Try saving that up on a 78K income… you think wages will increase with all this debt around? Not a chance.

      Prices must increase. Debt must grow. Wages will remain stagnant. But something has to give.

  2. Jumping jack flash

    Obviously the savings chart also does not take into account having children and trying to save for a deposit.
    Kids are an immense financial drain, speaking from experience.

    I guess if all the kids did was school and netflix, then it may be possible.

    • It’s your typical feudal society. Those who are privileged pass it down to their kids. Those who aren’t, their kids are screwed.

  3. It is a scheme to put loans in the hands of new migrants to buy new apartments and house and land packages. The beneficiary is the developer. The policy was designed by the HIA.

  4. plebngineerMEMBER

    It’s too low to buy a house in Sydney anyway. Why not cater for larger incomes? Less risk?

    • Price limit Is way too low for Sydney. You cant buy a house for 700k..maybe a car space or two.