Housing affordability is becoming an increasing concern for first home buyers and policy makers amid recent, rapid price increases in housing values. But the double-edged sword of reducing housing values to make them more affordable, is that housing also makes up the majority of Australian household wealth; make housing more affordable for one Australian, and we risk reducing the wealth for another.
In contrast to the Labor party platform of reducing housing demand through the 2016 and 2018 elections (via reducing or removing incentives for housing investors), the federal government have utilised a different approach to boosting the rate of home ownership. They focus on increasing accessibility of mortgages, rather than risking any downward pressure on residential property prices. The First Home Loan Deposit Scheme was an earlier example of this strategy, aimed at helping first home buyers over the deposit hurdle, “while protecting the value of homes”. This scheme, along with other incentives such as the first home buyers grant and HomeBuilder, has likely contributed to the relatively high participation of first home buyers in the market over the course of 2020-21.
The 2021-22 Budget builds on that strategy, extending the leg-up over the deposit hurdle. This time, there is assistance specifically for single parent households, as well as support for first home buyers purchasing or building new homes.
The major housing measures handed down in the Budget are outlined below, alongside some possible implications for housing market dynamics.
Single parents will be given federal government assistance to purchase property
Under this policy, known as the ‘Family Home Guarantee’, the government will guarantee 18% of a home loan for 10,000 eligible single parents, whether they are first home buyers or previous owner-occupiers. This essentially enables property purchases with a 2% deposit, without the borrower paying lenders mortgage insurance (LMI). Based on a typical entry level Australian dwelling value ($431,194), this could reduce a deposit requirement from around $86,000 to $8,600. Ten thousand places for the scheme are to be provided over four years.
While full details are set to be outlined next week, the Family Home Guarantee seems well targeted. Single parent households tend to have lower rates of home ownership than other household types. Single parent households are also largely headed by women, making up around 64% of lone parent and lone adult households. As a result, this policy may contribute toward narrowing the gender wealth gap.
However, low deposits mean more debt. More debt means more interest needs to be paid over the life of the loan. At the entry level property value used in the example above, a 20% deposit home loan at a 2.4% interest rate would accrue roughly $121,000 in interest over a 25 year mortgage with monthly payments. The same borrowings at a 2% deposit would amount to around $145,000 in interest. Taking on more debt may still be worthwhile if the borrower is otherwise spending tens of thousands of dollars each year on rent. Even more beneficial could be the long term gains in real asset values that come from accessing ownership earlier with a lower deposit, which could be another factor helping to outweigh the additional interest paid.
The government will extend the first home loan deposit scheme (new homes) by 10,000 places
The initial round of the federal government First Home Loan Deposit Scheme, introduced at the start of 2020, was extremely popular with first home buyers. The majority of the initial 10,000 places were reserved within two months of its launch.
This signifies just how much of a barrier the deposit hurdle is to accessing housing. But first home buyer incentives amid economic uncertainty also have precedence. The first home buyer remains an important source of potential housing demand, particularly as the relatively large millennial generation is now around the typical first home buyer age.
The additional 10,000 places introduced through 2020, which was just for new dwelling purchases, is being re-deployed and re-branded as the ‘New Home Guarantee’ in the Budget. This is unsurprising, with most of the housing incentives introduced for first home buyers since the start of 2020 being specifically for new supply. While there is evidence to suggest first home buyers prefer established housing, incentives designed specifically for the purchase of new property have been successful in funnelling new demand into new builds.
The benefits of such a policy are advocated to be two-fold, creating seemingly easier access to home ownership, as well as generating economic activity in the construction sector. For example, the Morrison government touted HomeBuilder as creating “more opportunities for first home buyers to enter the property market” while also helping to “fill the gap in construction activity expected in the second half of 2020”.
Diverting new demand into new property can also insulate the established market from additional price increases, by providing a new unit of supply for each new unit of demand.
However, demand-side policy for new housing can put upward pressure on the cost of construction, with anecdotes of increased supply chain costs and labour shortages becoming increasingly common. As dwelling approvals and commencements surge off the back of HomeBuilder, it is possible that the purchase and construction of new homes could actually become more expensive for first home buyers in the short term.
In the longer term, there is concern that a chunk of first home buyer demand has been brought forward by the strong take up of HomeBuilder, the FHLDS, and other state-based incentives. This was acknowledged in the budget papers, with a recent surge in construction activity representing a “bring-forward in demand from future years”. The chart below, which utilises ABS housing finance for data for first home buyers, highlights how FHB activity can be concentrated around government incentives.
With international border closures expected to remain well into next year, the first half of 2022 may see a slowdown in construction activity as new builds are delivered.
First home buyers can save more through their superannuation
The First Home Super Saver Scheme was announced in the 2017-18 Budget. The scheme allowed for voluntary contributions of up to $30,000 to be released for first home buyers, which could be used for the purchase of property owner-occupied property. The scheme works by accelerating savings through the tax benefits associated with superannuation. The 2021-22 Budget outlines an increase of these voluntary contributions of up to $50,000 to be released. Increasing the cap to $50,000 seems reasonable, particularly in an environment of low savings deposit rates, and rising asset values.
The government will expand the eligibility age for downsizer contributions by five years
The downsizer contribution was announced in the 2017-18 Budget. The measure allows older Australians to make a tax-free contribution to their super of up to $300,000 (each) from the proceeds of selling their home, without being counted toward the contribution cap. From July 2022, Australians 60 and older (as opposed to 65 and older) will be able to access the scheme.
The measure may free up more established housing by incentivising home sales sooner than at age 65. This is particularly important in the current climate, where housing demand remains high against a low supply of available properties; total listings volumes remain -23.4% below the five year average level. However, the measure will not come into effect until July 2022. This means motivated downsizers aged 60 to 64 may wait for the scheme to come into effect before selling, and any impact of increased listings as a result would only impact the housing market then. It also worth noting that in the almost three years since the scheme was implemented, only around 22,000 individuals have accessed it, so this may not add materially to supply.
A significant boost to infrastructure spending could also help to support housing demand in areas set to benefit from the capital investment. The budget outlines an additional $15.2 billion in infrastructure investment, bringing the total investment in infrastructure projects to $110 billion over the next decade.
Some of these big-ticket items include $2 billion dedicated to the Great Western Highway between Katoomba and Lithgow in NSW, $2 billion for the Melbourne Intermodal Terminal, $640 million for upgrades to the Bruce Highway and the Cairns Western Arterial Road duplication in Qld, $237.5 million for METRONET works in Perth and $2.6 billion for the north south corridor in South Australia.
Large infrastructure projects not only create jobs and stoke housing demand during the roll out of the project, but they also provide long term efficiency and productivity improvements for residents and workers. Historically there has typically been a lift in housing and investment demand in areas associated with a significant capital investment.
Overall, this budget is one that extends on the Federal Government approach to housing affordability which has been evident since the introduction of the FHLDS. Making targeted, low deposit loans available, increasing savings measures and providing demand-side grants for new construction of housing does not change the fundamentals of our housing system. Rather, it increases participation in an existing framework.