While the federal government’s expansion of the Home Guarantee Scheme might help boost homeownership rates, it is not without any drawbacks in terms of Australian’s personal finances and the wider housing market.

CoreLogic head of research Eliza Owen analysing whether the scheme is good or bad is a complex task but one of the biggest concerns is the higher interest costs for homebuyers.

“With the cash rate likely to rise sometime in the next 12 months, this will exacerbate interest between those on a 5% and 20% deposit loan,” she said.

“Understanding interest is extremely important when taking on large mortgages, especially when targeting these schemes to younger Australians and women, where rates of financial literacy among these groups tend to be lower.”

While interest costs on a 5% deposit mortgage may be larger, it is still crucial to look at it against the cost of not being in the housing market.

Still, Ms Owen believes that the scheme does help potential homebuyers enter the market sooner, as it roughly cuts the time it takes to save a deposit by up to a quarter.

Based on the median price of $728,034 (February 2022), it would only take 2.3 years for the median household to save for a 5% deposit versus the 8.8% years needed to save for the typical 20% deposit requirement.

“This could cut 6.5 years in the rental market, which at current weekly rent values on the median dwelling in Australia, equates to almost $160,000,” she said.

Buyers can also save over $30,000 in lenders mortgage insurance (LMI) with the scheme.

Are the price thresholds reasonable?

Ms Owen said that around 35% of Australian dwellings qualify for the scheme based on current price caps for established properties.

This means that more dwellings are likely to be available for potential applicants if prices decline.

However, Australia’s diverse housing market means the stock availability varies widely by region.

“CoreLogic’s analysis shows the proportion of qualifying properties ranged from up to 66.3% of dwellings in Perth, to just 10.7% in the ACT,” Owen said.

Ms Owen said there needs to be a regular review so that the price caps of the scheme adapt to the changing conditions of the housing market.

Are the income thresholds too high?

Homeownership rates in Australia has already fallen from 71% in 1995 to 66% in 2016 and this could be associated with lower income, according to Grattan Institute.

“This means addressing low rates of home ownership should target lower income households,” Ms Owen said.

However, the income thresholds for the First Home Loan Deposit Scheme are relatively high — $125,000 p.a. for single applicants and $200,000 p.a. for couples.

According to ABS Household Income and Wealth Data, a gross household income of $200,000 annually placed households in the top 20% of incomes. This means that median household incomes were closer to $88,000.

“Couples earning up to $200,000 can qualify for the FHLDS, though figures would suggest their risk of missing out on home ownership without it is lower,” Ms Owen said.

However, the National Housing Finance and Investment Corporation (NHFIC) noted that highest concentrations of guarantees have been below the income thresholds through 2019-20, at $60,000 to $80,000 for singles and $100,000 to $125,000 for couples

“The purchase price caps may also have a self-selecting effect, with those on higher incomes seeking more expensive homes,” Ms Owen said.

The limitations to expanding the guarantee scheme lies in the refining of income and price thresholds, rather than a major default risks for first-home buyers.

In fact, the risk of negative equity, Ms Owen said, is mitigated by the long hold period of owner-occupiers and the strong labour market.

“An objective of housing policy should also focus on more equitable housing outcomes across income brackets, including adequate provision of affordable housing for those who are unlikely to achieve home ownership,” Ms Owen said.

Will the expansion boost housing demand?

Ms Owen said one of the potential impacts of the expansion of the scheme that could be good or bad is the likely boost in housing demand.

Historically, demand increased after the announcement of targeted grants to first-home buyers.

“The temporary boost to the First Home Owner Grant increased housing activity around the time of the global financial crisis in 2008, when a lift in real estate transactions positively impacted the economy,” Ms Owen said.

“Expanding the FHLDS could increase first homebuyer numbers at a time when the housing market outlook is uncertain — alternatively, this could increase demand for more affordable properties, increasing prices in this segment.”

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