As of the first day of 2020, the Federal Government launched a new incentive designed to give young people the opportunity to own their first home – the First Home Loan Deposit Scheme.
Some of the chief concerns surrounding the Scheme are namely the fact that there is a limit on the number of eligible applicants (10,000), and the fact that each city carries a different price cap (Melbourne – $600,000, with a median home price of $720,000, and Sydney – $700,000, with a median of $920,000).
However, despite the criticisms, there has been an avalanche of support for the Scheme from the property industry, such as the Property Council of Australia, and property peak bodies such as REIA have suggested that the property price thresholds are correctly placed.
Despite the criticisms, was the Scheme actually designed to help people searching for above-median price properties?
The purpose of the FHLDS:
In a statement made on November 26, Minister for Housing and Assistant Treasurer Michael Sukkar stated:
“The First Home Loan Deposit Scheme has been specifically designed to support first home buyers purchase a modest home, getting them into the property market sooner.”
The statement continues to say; “The Scheme provides a guarantee that will allow eligible first home buyers on low and middle incomes to purchase a home with a deposit of as little as 5 percent. The Scheme will support up to 10,000 loans each financial year, starting from 1 January 2020.”
It is important to note, at this point, that the Government is open to looking at raising the cap, and that there is a review planned in 12 months time.
Another important facet is that the Scheme is based on the financial year, not the calendar year, according to a spokesperson from the National Housing Finance and Investment Corporation. This means that we enter the Scheme halfway through its designed usual cycle, and that it resets, and 10,000 new applicants will be eligible, on July 1, 2020.
As noted by MCP Financial, the big four banks have been restricted in their involvement in the Scheme, no doubt after their fall-from-grace following the Royal Commission. They will be restrained to providing no more than 5,000 loan guarantees in each financial year. Instead, the Government has approached several smaller lending companies, providing competition from small business. In adherence to the Scheme, credit providers will also be selected on factors including: standard of customer care, including treatment of borrowers in financial hardship; the competitiveness of loan products offered for FHLDS, including interest rates and other fees; the quality of loan origination processes and risk to the Government; and the extent to which a lender will promote competition in lending markets and related markets.
Why is the Scheme needed?
The reason that the Scheme is timely, is that Australia is potentially heading towards economic downturn.
In a piece from August 2019, the Guardian reported that
“Australia looks set for its worst economic performance in almost three decades… the Australian economy would be halfway to a recession, defined as two consecutive negative quarters.”
Reflecting back to 2008 and the GFC, the property market was stimulated from the bottom end. The Rudd government gave first home buyers $15,000 towards their first property. They also imposed no stamp duty on property up to $500,000. This saturated the bottom end of the market with first home buyers, rolling the existing residents of that bracket upwards. This is how it happened:
What we found back then was that properties sub $500,000 started selling very quickly. Those sellers didn’t expect to sell so quickly, and were forced to make their next step up in the market from, say, $600,000 to $800,000. So we found that that segment was the next to boom, again displacing the next tier and creating another selling-buying cycle. Stimulus from the entry-level segment of the market has a ripple effect on the rest of the market.
It seems, in light of the aims of the Scheme, that the Government is attempting to learn lessons from the Rudd Government’s response to the GFC and provide a stimulus package to help middle and working class people survive the downturn and continue taking part in one of Australia’s most popular economic components – property.
Taken from CoreLogic. The recovery in the market following the stimulus package during the GFC. Note the depression in 2008, then the recovery in 2009 in Brisbane and Sydney:
Interested in applying for the First Home Loan Deposit Scheme?
Check out the property price cap look-up tool on the National Housing Finance and Investment Corporations website: