The Context

In May 2019, the Morrison Government announced the First Home Loan Deposit Scheme with a funding amount of $500 million, where the federal government provides a guarantee that will allow up to 10,000 eligible first home buyers on low and middle incomes to purchase a home with a deposit of as little as 5 per cent. 

The aim of this Scheme is to assist aspiring first home buyers to realise their goal of purchasing their first home sooner and protect the value of the existing houses thanks to a larger pool of buyers in the context of a declining market.

The key elements of the Scheme are set out as follows:

• Our First Home Loan Deposit Scheme helps eligible first home buyers purchase a house with a deposit as low as 5%, instead of the conventional 20% deposit.

• First home buyers could save around $10,000 in Lenders Mortgage Insurance (LMI) under the scheme.

• First home buyers with an income of up to $125,000 (or $200,000 for a couple) will be eligible.

• 10,000 eligible first home buyers will access the Scheme based on a first-come first-served basis.

The government also specified the price thresholds in capital cities, large regional centres with a population over 250,000 as listed below:

The Government also justified the reasons for higher caps in some regional centres: “The capital city price caps will apply to large regional centres with a population in excess of 250,000, namely the Gold Coast, Newcastle, Lake Macquarie, the Sunshine Coast, Illawarra (Wollongong) and Geelong, recognising that dwellings in large regional centres tend to be significantly more expensive than other regional areas.”

Does This Policy Really Achieve Its Objectives?

The number of first home buyers over the last 20 years is sitting at around 7,000-8,000 per month/or 100,000 per year, which is equivalent to 20% of all property purchases in Australia. Notably, there were a few episodes when the number of first home buyers was trending above average, such as during 2009, 2012 and 2018.

The conventional thinking would be that aspiring home buyers who are in the progress of saving toward a 20% deposit would now be able to enter the market with only a 5% deposit, which will add 10,000 buyers into the market. 

However, this may not be the case. Most existing first home buyers, that already have a 20% deposit saved up, would also be eligible to apply for this new Scheme due to the following reasons:

• The average size of a home loan that first home buyers take is $270,000 in 2019, which is equivalent to property prices well below the thresholds to be eligible for the Scheme. 

• The income thresholds are $125,000 and $200,000 for individuals and couples, respectively, which cover up to 80% of all full-time workers and up to almost all first home buyers.

In this sense, the first home buyers who enter the market under the new Scheme will have to compete with the existing first home buyers who may also be permitted to apply for the Scheme. As such, first home buyers that participate in this scheme scheme will essentially be able to use the 15% deposit to bid up the prices.

Consequently, the First Home Buyers Guarantee may create a negative side effect for first home buyers, where they will be required to pay higher prices and take larger mortgages that put them deeper into debt.

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