As demand and prices have surged across residential markets, for most first-time buyers the headlines must look daunting. All sorts of homes from top-end mansions to renovation wrecks, have been attracting sky-high prices as auction crowds surge in numbers before our very eyes.
News reports recently announced that average house prices in Sydney have now jumped by $1220 a day. Partly driven on the back of an economy that has surpassed its pre-pandemic peak.
However, this same headline may be pointing to a long-term negative impact for local first-time buyers, and it’s also a common trend currently seen in other markets, for example in the USA, United Kingdom and New Zealand.
Given the undoubted strength of markets, where does this leave first-time buyers? While varied levels of assistance are being offered, the question remains: is it enough, and that includes for Australian first-time buyers? Let’s have a look at some of the assistance, starting with the United Kingdom.
In the UK after reduced stamp duty cuts sent demand and prices sky-high, there are a wide range of incentives for FHBs, some of which mirror trends here.
One common idea is reduced deposit loans with the UK increasing the availability of 95% mortgages via the big banks including Lloyds, NatWest, Santander, Barclays and HSBC.
The plan will give UK banks and building societies the chance to buy a guarantee on the riskiest portion of the mortgage – the bit between 80% and 95% loan-to-value. The UK government would cover that amount of any lender’s losses if a home had to be repossessed.
Another scheme is ‘The help-to-buy equity loan scheme’ – a loan from the government that FHBs put towards the cost of buying a newly built home.
Shared ownership, which is also an idea that’s often floated here, but with very limited success, has been promoted in the UK as an affordable option creating a foot on the property ladder at a lower cost. However, critics say, and buyers appear to agree, there are plenty of potential downsides.
Rent-to-buy schemes are aimed at helping lower-income households without a deposit. With rent-to-buy you pay an affordable rent on a new-build home for between five and 20 years and save for a deposit to buy the property.
It’s a scheme via local authorities and housing associations and residents are usually key or essential workers with a link to the local area. Like Australia, the UK has a problem with affordable housing for essential workers. Here some local councils offer development concessions when homes are built for essential workers, but with only limited success.
In the United States First-Time Home Buyer Grants and Loan Programs are available in many cities and regions.
Grants are specific loan programs for first-time buyers, and they provide down payment and/or closing cost assistance in a variety of ways including grants, zero-interest loans, and deferred payment loans.
In the US and in most similar markets the biggest hurdle, however, appears to be saving a big enough deposit. Expanding access to superannuation in Australia fits this same criterion.
In New Zealand, where the outlook for FHBs is even tougher than Australia, the income cap to access First Home Grants and Loans was recently lifted from $NZ85,000 to $NZ95,000 for single buyers, and from $NZ130,000 to $NZ150,000 for two or more buyers.
As we’ve seen in the UK and here, the NZ government is also expanding access to 5% deposit finance.
Like Australia, NZ also has a problem with supply and between an additional 80,000 and 130,000 homes could be built over a 20-year period, but this would require co-operation between the private and public sectors.
Another similarity is that NZ property investors are currently making up the biggest share of buyers, making them a financial target. The New Zealand housing market has become the least affordable in the OECD, making FHB assistance a hot issue.
However, I have big reservations about the idea of punishing investors as we’ve seen in Victoria. In NZ investment properties sold within 10 years will have different capital gains tax rules and the government will remove the ability for property investors to offset their interest expenses against their rental income when calculating tax.
In the US the housing market looks much the same, in-fact according to market reports there, even more so. Demand is so strong that half the homes listed nationwide in April went to pending in less than a week. [Sale or offer pending in the US simply means that a buyer has submitted a formal written offer and the seller has accepted it.]
That’s a remarkable situation as this isn’t the sort of market where another buyer can simply outbid all the other buyers – it’s already past that point.
There’s also a clear alignment with our market where we’ve seen an almost siege-mentality at some auctions with under the hammer prices well above reserve. In some cases the end price has been hundreds of thousands over reserve.
In the US some markets are so frantic that one poll found that most buyers admitted to bidding on homes they’d never seen in person. Here we’ve also seen reports where offshore buyers have done the same, buying without a personal inspection.
However, offshore buyers should not be counted as a big concern among local FHBs. For the first-time buyer, making things harder is the fact that the US economy is flush with cash as national savings rates have soared to their highest level in years as they have also done in Australia.
On top of all that, interest rates have basically declined to their lowest point ever, luring more buyers into almost every market encouraging strong demand and competition.
Supply issues are just as important – construction of new homes in the USA, UK, New Zealand and Australia has not kept pace.
Another trend impacting first-time buyers in many countries is the fact that seniors, who have for decades sold their homes to downsize or seek a tree-change or sea-change, are now more likely to “age in place”, which is keeping lots of homes and development opportunities off the market.
Let’s now turn in more detail to Australia. Both Federal and State Governments offer varied grants and concessions to directly and indirectly help first-time home buyers and importantly those saving to buy. The assistance changes frequently however, the recent Federal budget covered a few core areas.
In a not unfamiliar policy, the focus is on increasing accessibility of mortgages, rather than risking any downward pressure on existing prices. These schemes follow very popular incentives such as the first home buyers grant and HomeBuilder grants.
Single parents will be given Federal Government assistance to purchase property. Under the policy the government will guarantee 18% of a home loan for 10,000 eligible single parents which virtually creates property purchases with a 2% deposit, without the borrower paying lenders mortgage insurance.
In addition, the government will extend the first home loan deposit scheme (for new homes) by 10,000 places. While many first-time buyers prefer established housing, this incentive aims to increase new demand into new constructions, and this also boosts the wider economy.
First home buyers can also save more through their superannuation, first announced in the 2017-18 Budget. This allowed voluntary contributions of up to $30,000 to be used to buy an owner-occupied property. The 2021-22 Budget increased the amount to $50,000, here again we see the aim being to help save a deposit.
The government will expand the eligibility age for downsizer contributions by five years which allows older Australians to make a tax-free contribution to their super of up to $300,000 (each) after selling their home. From July 2022, the age for access will fall from 65 years of age to 60. As mentioned earlier this is also an area being seen or addressed in other countries including the United States.
In many countries, a majority of the first-time buyer assistance is focused on deposit assistance and relief from some government duties and taxes. However, unlike other periods when access to housing was a concern, there are few examples of governments directly building and then either selling or renting a lot more homes.