First-home buyer deposit guarantees likely to push up house prices, economists warn

House prices are likely to increase under Prime Minister Scott Morrison’s plan to boost first-home buyer affordability by guaranteeing a 5 per cent deposit, economists warn.

The proposed $500 million scheme announced on Sunday will see eligible first-home buyers, with at least a 5 per cent deposit for a home, qualify for a loan. They’ll also save around $10,000 by not having to pay mortgage insurance to lenders under the scheme. The scheme would be capped at 10,000 loans per year.

While the scheme would enable first-home buyers to get onto the property ladder faster, there are concerns it will encourage them to take on more debt and drive up prices — ultimately making it more expensive — at a time when the lending practices of banks have been under attack.

“Policies like this tend to drive up prices,” said EY chief economist Jo Masters. “First-home buyers … will be able to borrow more than they would have done otherwise, it will generate more demand in a sense and bring prices up.”

Mr Morrison on Monday said it was “difficult to say” if prices would rise under the plan.

“We want to see more first-home buyers in the market, absolutely, and we don’t want to see people’s house prices go down,” he said at a press conference. He added that loans would be granted on a first come, first served basis.

“The scheme will ultimately be determined by the number of loans approved by the lenders and the arrangements with the National Housing Finance and Investment Corporation.”

The corporation will act as guarantor on the loans.

Labor announced on Sunday that it would also introduce the scheme if it wins Saturday’s election.

Ms Masters’ biggest concern is the initiative will simply encourage first-home buyers to borrow more, increasing debt to income ratios at a time when the banks have been pushed to reduce them.

“It seems to be encouraging first-home buyers … to take out a mortgage at a 95 per cent LVR (loan to value ratio) and that’s against a backdrop of several years of APRA and the royal commission working to improve credit standards and reduce future financial stability risks.”

It was concerning to encourage people to take on a higher LVR at a time when prices were falling across much of Australia, Ms Masters added, because it was easier for them to fall into negative equity.

AMP Capital chief economist Shane Oliver said the plan would likely help to stablise the market and would be one reason a worst case scenario, such as a 40 per cent peak to trough price decline, would not eventuate.

Dr Oliver said uncertainty surrounding the scheme, in terms of the price point of eligible properties, made it difficult to predict its impact, as did the limit of 10,000 loans a year. He added first-home buyers may also be hesitant to take on such high levels of debt.

“That’s the big uncertainty here. If it were an out and out grant people would snap it up, some first-home buyers may be wary of borrowing 95 per cent of the value of a property but I would suspect some may jump at the chance,” he said on Monday.

“There will be concerns about it encouraging households to take on more debt,” Dr Oliver added. “Skeptics might say this is just bailing out the baby boomers and generation X who don’t want to see property prices fall to far.”

He added that while it was far from a “game-changer” and unlikely to have as much of an impact on the market as an upfront grant would, more government incentives could come to help stabilise the market.

“If the property market continues to slide away, whoever wins the election might just scale it up or adopt a grant. This isn’t necessarily the end of the story.”

Domain economist Trent Wiltshire echoed the concerns and added the scheme would likely be ineffective in helping first-home buyers long term.

“It will help some people, but in terms of trying to improve affordability, it may not be that effective,” Mr Wiltshire said.

But, he said, it would help provide a more level playing field for those without access to the bank of mum and dad,  because first-home buyers increasingly turn to their parents to go guarantor.

“It will give those that wouldn’t have access to bank of mum and dad access to a guarantor, on the other hand it means people who may have used the bank of mum and dad would rely on government. The government is now taking on the risk rather than their parents,” Mr Wiltshire said.

“It’s maybe a bit of equitable policy, but it’s income limits mean it’s not as well targeted as it could be,” Mr Wilshire added, noting the income cut offs for a similar policy in New Zealand were substantially lower.

RMIT Emeritus Professor Tony Dalton, who works with the Australian Housing and Urban Research Institute, said the scheme was a “drop in the bucket” for those struggling to afford to buy a home.

The 10,000 cap meant only 1 in 10 first-home buyers would benefit from the scheme and would have no impact on the affordability of homes.

“It will have very little impact on the structural decline of housing affordability for low to moderate income earners,” Professor Dalton said.

Professor Dalton said the result of earlier schemes, like the first-home buyers grants and stamp duty concessions in Victoria and NSW, has two main effects.

“There is some house price inflation because of demand. Volume builders on the fringes crank their house building programs to meet that extra demand,” Professor Dalton said. “I don’t think that’s going to happen with this scheme though because it’s very small.

“The second effect is that is pulls through – it brings people onto the market who wouldn’t have otherwise been there.”

Those people then have to wait to upgrade for longer and this slows down the second-home buyer market, he said.

The University of Adelaide’s Chris Leishman, from the Centre for Housing, Urban and Regional Planning, said the people who would benefit most were those that already had money to buy.

“The market is really unaffordable and this doesn’t make it more affordable,” Professor Leishman said.

He said it was worrying that the ALP and opposition leader Bill Shorten was agreeing to this policy without thinking longer term about housing affordability.

“We need to rethink how we deal with housing affordability over the next 20 years – not just the next week,” Professor Leishman said.

The Real Institute of Australia on Monday joined Metricon, the Property Council and Master Builders Australia in supporting the scheme.