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The First Home Loan Deposit Scheme: Housing affordability action – or just more busy work?

Posted by on October 31st, 2019 · Affordability, Finance, Government, Housing

By Hal Pawson, City Futures Research Centre.

The Australian Government has this week revealed the policy details for the First Home Loan Deposit Scheme (FHLDS). From 1 January qualifying first home buyers (FHBs) become eligible for a government guarantee that will enable them to access a mortgage with a 5% deposit rather than the normal 20%, at no extra cost to the borrower.

The FHLDS originates from a Prime Ministerial eleventh hour election campaign pledge, which – beyond personal tax cuts – was almost the only ‘new policy commitment’ of the Coalition’s entire 2019 pitch. For the third election of the last five, housing featured as an important part of the campaign – after decades of being a near-invisible issue – suggesting housing concerns have a high political salience.

Government was responding to public perceptions that home ownership is slipping further out of reach for growing numbers of young people. Young adult home ownership declined from 51% to 40% over the past 20 years. Back in the early 1980s it was 60%.

We’ve entered an era when home ownership is inaccessible across huge swathes of our major cities unless you’re a very high income earner and/or you have access to a well-endowed bank of Mum and Dad. For example, in 2005 there were still seven (of 81) postcodes within 10km of Sydney CBD that were ‘affordable’ for typical FHB households. In 2015 there were none. Other than for high earners or those with family wealth, this entire area is out of bounds for aspiring home-owners.

Current situation

In Sydney, median house prices are currently running at $905,000, down around 14% on the 2017 peak. However, lower quartile prices have fallen by only 8%. Moreover, despite the recent reduction median prices are still over 50% higher than in 2011. Because wages haven’t increased by anything like this amount, the ratio of housing prices to incomes has increased.

A major reason for house price increases has been interest rate reductions that have bumped up borrowing capacity. Typical mortgage interest rates have fallen from 7.8% in 2011 to only 5.3% by the end of last year and now lower still. This has made it possible for people to borrow larger and larger amounts for a given household income. So although prices have been rising much faster than wages the cost of home ownership measured in this way hasn’t increased as much.

BUT falling interest rates don’t make it any easier to save for a deposit. That’s the part of the house purchase price you have to contribute in cash – the 20% bank normally won’t lend you. Where banks accept a deposit less than this benchmark, they require the borrower to pay for lenders mortgage insurance. According to the Grattan Institute, it will take a typical FHB 10 years to save a 20% deposit for a typical house now, compared with only 6 years in the 1990s. So a rising wealth barrier has appeared.

From ABS survey data we know that, across Australia, there are about 127,000 renter households aged 25-34 with wealth equating to 5-20% of low price homes in their area. This is the government’s target group for the FHLD scheme, although many won’t be earning enough to sustain the repayments on a 95% mortgage – so enabling them to avoid the full 20% down-payment won’t help.


While this effort to aid marginal home buyers takes a novel form, it covers familiar territory for policymakers. There’s a long history of publicly-funded FHB assistance schemes. For example, some state and territory governments have for many years provided affordable housing finance to low- and moderate-income home buyers through small-scale direct lending programs and shared equity products.

And, since 2000 a variety of FHB grant schemes and stamp duty relief initiatives (sometimes limited to newly-built homes) have been funded by both main levels of government. As part of the post-GFC stimulus package, for example, FHBs could land grants of as much as $35,000. In more normal times such grants are often worth $10-20,000. In NSW the current grant – available for any FHB buying a newly-built property at below $750,000 – is $10,000.

Stamp duty relief is often more generous. In NSW, for example, this is available on homes priced at up to $800,000 (full exemption on properties priced at up to $650,000). The value of this exemption for a FHB buying a $650,000 property is $21,000.

Morrison’s new package

Under the FLHDS someone may access home ownership with only 5% deposit payable. In Sydney, a lower quartile priced property now costs you $570,000. A 20% deposit on that would be $114,000. If you can get a mortgage with a deposit of only 5% that’s less than $30,000 – a far lower amount you’d need to save. This would cut waiting time: perhaps 2-3 years for the average FHB, not 10 years. It also saves FHBs money they’d otherwise pay on mortgage insurance: about $24,000 over the life of a mortgage if the bank is willing to grant your loan on these terms.

But the new scheme is only guaranteeing part of your loan, not paying for it. You still need to be able to meet the repayments on a 95% loan for your entry level home. Only a household earning substantially above the national median income would be able to afford this.


FHLDS has been criticised on several counts:

  • Maximum eligible incomes are quite high – couples earning up to $200,000 (more than double the national median household income) will be eligible – on this basis it could be criticised as a largely untargeted policy – or, less politely, ‘middle class welfare’. The NZ scheme cuts out at $130,000 for a couple.
  • The scheme is very small – capped at 10,000 guarantees awarded per year, this equates to only around 1 in 10 FHB loans issued per year.
  • For many or most of those benefiting the result will be to bring forward home ownership rather than to enable access to home ownership for people otherwise excluded. For that reason, the scheme will not increase home ownership significantly over the longer term.

A bigger failing is that this is a scheme which simply enhances capacity to buy – for a relatively small number – it does nothing to address the causes of housing unaffordability. It could well be more of a palliative – a convenient (and quite inexpensive) form of ‘busy work’ – rather than serious and responsible action. To tackle the problem in any fundamental way there is a need to dampen housing demand and/or enhance supply such as through:

  • Phasing out the tax settings that encourage over-investment in housing – in the language of economics, problematically distorting investment choices. Most prominently, negative gearing and Capital Gains Tax (CGT) concessions for landlord investors have been estimated as costing at least $10 billion per year.
  • Boosting supply by investing in transport infrastructure that adds to Australia’s stock of well-located land – in this way helping to slightly soften land prices.
  • Directly investing in affordable rental housing that can help to stabilise the housebuilding industry as well as directly benefiting lower income households with no prospect of home ownership.

And beyond the above points, we have to question the judgement of a government whose only housing affordability initiative targets a constituency (potential FHBs with modest savings) that is only around a fifth of the number of Australians pushed into poverty due to unaffordable rents.

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