What can we do to help out first home buyers?

Over recent months we have seen a number of high profile residential projects going to market and achieving spectacular sales results, with entire buildings or releases quickly sold out. The market is responding to strong demand driven by a major shift in demographics, local and off-shore investor appetite for property and a market that is still characterised by undersupply, in some markets chronic under-supply. However as a result of this strong demand matrix one group, the first home buyer (FHB), appears to be missing out.

This is not only apparent in many off the plan markets, but is also a stark factor for established homes and in NSW the FHB market is down to 9% of activity, and so the question is should we be doing more to help first time buyers into the market?  In particular at a time of low interest rates these buyers should be more active, but despite some limited help and concessions they are not.

Tough times for the FHB are not only confined to the Australian market, there have been similar concerns in the United Kingdom, where a new range of measures to help have recently been introduced and the big change was to extend assistance beyond the new build buyer. The UK’s so termed Help to Buy schemes now include established homes. As our government appears to be shying away from almost any sort of assistance for anyone, the UK example heads in the opposite direction with a package of assistance.

Mortgage guarantee

Here’s how it works, since October this government scheme was extended from only newly built homes to include established homes up to a value of £600,000 (that’s about A$1,003,000). In part this shows you how unrealistic the current local concessions at a ceiling price of $650,000 are. Buyers need a minimum 5% deposit, they have to borrow from a participating lender and it must be the buyer’s only property.

The government for its part guarantees repayment of the mortgage to the lender, and the scheme is expected to run for some three years. With many local suburbs (185 plus in Sydney) now looking at median prices of $1m this sort of package would be welcomed in the Sydney market.

Equity loan

This government helping hand in the UK is very different and nothing like this has been seen here, apart from a very small number of ‘one-off’ housing co-operatives around in the 1970s. Here’s how these equity loans work. They are limited to homes, new homes valued to £600,000 being purchased by first time buyers, who must have a 5% deposit. The government then kicks in 20%, and here’s the interesting point, the loan is interest free for five years. So the first time buyer then only has to find 75% of their loan.

After five years the ‘equity loan’ attracts a fee of 1.75% of the loans value, which is adjusted each year to the UK equivalent of our CPI. The 20% loan has to be paid back when you sell, but that’s 20% of the sales price, not the original loan – hence the government and the UK taxpayer share in the capital growth of the home. Here such equity loans, possibly linked to superannuation have been ‘talked’ about, but that’s it.

Sometimes I do question the rigid instance that personal superannuation is locked up away from home buyers. Yet via self-managed funds, some super can be invested in real estate, which possibly compounds the plight of some first time buyers. In the UK these equity loans have been around since April last year.

New buy assistance

This is another scheme linked to new builds and involves co-operation between private lenders and some major builders. The scheme is limited to new homes valued to a maximum of £500,000 and is open to buyers with a minimum 5% deposit.  The basic idea is to make available to these buyers more attractive loan rates, which are usually only accessible to buyers with big deposits. This is a private not government backed idea.

Shared ownership

This is another idea floated locally, but is not common. The idea is that via the participation of private developers and housing associations, the FHB buys a percentage of their new home; usually 25% and then they ‘rent’ the rest at below market rates. As more money is available by a process known as ‘staircasing’ buyers then increase the percentage of the home they are buying and over time own more of the home and pay less rent.

To be eligible the rules are that you must be a first time buyer, or someone who used to own a home, they can no longer afford to buy that home and you need to earn less that an average of £60,000 – a little more if you live in London.

More imagination needed

These few ideas look like someone applied a lot of imagination to the problems of the first home buyers. Here we have failed to do so.  Our banks make huge profits, they could afford to be a lot more innovative, and why do we not use superannuation savings more in this area? The social benefits of home ownership are obvious and the benefits of a big boost in home building construction would as is already evident, help the economy even more to move from the mining boom, so why are we not doing more?