iscover
A report from Lateral Economics revealed that the removal of income caps and raising of property price caps, as well as the unlimited number of first home buyers (FHB) who can access the scheme, will increase annual demand by approximately 20,600 to 39,100 buyers (or 3.8 per cent to 7.1 per cent of annual home sales).
It claimed this will drive national property prices up by 3.5 per cent to 6.6 per cent in 2026 and for several years afterwards.
A property worth $800,000 would therefore cost a borrower an extra $28,000 to $52,800.
Further, around 6,500 lower-income FHBs will be priced out in the first year, the report said.
While well-intended, the potential outcomes of this policy prove there is no silver bullet to rectify the housing crisis.
Despite this, the introduction of this scheme is set to increase the rate of home ownership from 66 per cent to 67.2 per cent, as early adopters experience some relief.
The scheme appears to be somewhat of a double-edged sword. Barriers for entry will reduce but prices will increase.
This speaks to the complexity of introducing schemes and how property reform is such a difficult task to balance.
The rising cost to enter the property market may be unavoidable. Mortgage and Finance Association of Australia CEO Anja Pannek said members have reported an increasing portion of FHBs locked out of the market due to inflated prices.
The LMI impact
The removal of lenders mortgage insurance (LMI) is another pain point that could have far-reaching ramifications.
As recently reported by Broker Daily, the 5 per cent deposit scheme means the government fronts the LMI costs, cutting out external providers.
According to the Lateral Economics report, in 2019, before the Home Guarantee Scheme (HGS), around 3 in 10 FHBs required LMI. Now, just 1 in 10 require LMI. This is expected to fall further as the HGS is expanded.
The result of this reduction of FHBs utilising LMI could increase costs by nearly 20 per cent, the study said.
For a $700,000 home, the HGS will save an FHB $21,000 to 28,000 in LMI but will drive up the price of the home up by $37,100 to $69,300.
The report also claimed that around 30 per cent of LMI providers’ market share could be taken by the government.
Is the housing market better off without LMI?
Further reports claim that the removal of LMI would actually decrease property prices. According to Housing Industry Association (HIA) chief economist Tim Reardon, FHBs typically pay $25,000 in LMI.
“This meant fewer new households could buy a home, as their deposit was insufficient, requiring them to save for longer to pay this additional cost. This meant that more households were renting and renting for longer, which in turn forces up rental prices, making it even harder to save to buy a home,” he said.
Reardon added that LMI is actually reducing the number of homes being built as around a third of all new builds are done by FHBs.
This means LMI is making the housing crisis worse by lowering the home ownership rate and increasing returns for investors, he said.
HIA estimates that in three years, the short-term increase in prices will be offset by the boost in supply that will lower those prices.
Experts are clearly split on the impact of the HGS and there are passionate advocates for and against the policy.
While the HGS has been around for years, the expansion will allow more places and remove many of the caps that subdued adoption.
From 1 October, following the expansion, the housing market will experience a shift, for better or worse.
[Related: Backlash brewing as Home Guarantee Scheme chokes LMI providers]
