2.1
This chapter examines views made to the inquiry on the National Housing Finance and Investment Corporation Amendment Bill 2019 (the bill). There was broad support for the intent of the bill to assist first home buyers access the housing market. However, concerns were raised about how the First Home Loan Deposit Scheme (the scheme) will function—particularly as significant detail is not yet available, and will not be legislated.
2.2
Submissions to the inquiry predominantly addressed the following issues:
the effectiveness of demand-side schemes for housing affordability;
availability of housing under the scheme;
effect on the lenders mortgage insurance (LMI) market;
treatment of financial risk and its implications for lending institutions and product details;
the cap on 10,000 guarantees per year;
NHFIC's proposed research function; and
location and availability of scheme detail.
Demand-side schemes and housing affordability
2.3
The Grattan Institute argued schemes that boost demand, like the First Home Loan Deposit Scheme, cannot fix housing affordability and are well-known to be ineffective. In general, the institute stated, assistance for first home-buyers may help some individuals outbid an investor and purchase a property, but it does little to make housing affordable at an aggregate level.
2.4
Analysis completed by the Grattan Institute suggested 'even in the unlikely scenario that every one of those 10,000 [home buyers] each year couldn't have bought otherwise, home ownership would only be one per cent higher after a decade'.
2.5
The institute instead recommended other ways housing affordability might be improved, including:
Commonwealth incentives for state/territory/local governments to relax planning rules to allow more density in major cities; and
reforming tax and welfare rules (state taxes, capital gains tax, negative gearing, pension assets test) to reduce demand for housing.
2.6
In the EM to the bill, the government acknowledged the scheme would have 'little, if any, impact on house prices'.
Availability of housing
2.7
The committee heard concerns there would be little housing stock in capital cities that would meet the requirements of the scheme. The Australian Housing and Urban Research Institute (AHURI) stated there is generally a lack of supply of affordable stock for first home owners. Further, the central problem is not accessing LMI but getting a loan of the size required with a low deposit. Borrowers under the scheme will still have to meet the normal credit assessment requirements of financial institutions, including an ability to service a loan.
2.8
The Urban Development Institute of Australia (UDIA) undertook modelling that showed substantial limitations in the availability of housing for eligible participants. The institute found, using the current UBS HEM (household expenditure measure) calculations:
singles with $125,000 income at 95% LVR can take a maximum loan of $410,526
no house in any Australian capital city can be purchased for $432,576
only units can be purchased for $432,576 in the Australian Capital Territory, Adelaide, Brisbane, Darwin, Hobart and Perth
neither a house or unit can be purchased in Sydney or Melbourne; and
couples with $200,000 income at 95% LVR can take a maximum loan of $789,474
a house can be purchased for $762,698 in every capital city except Sydney
a unit can be purchased for $762,698 in every capital city.
2.9
These findings, the UDIA argued, are significant. Single income households are the fastest growing demographic currently seeking access to the housing market. Further, UDIA modelling is based on a 'best-case scenario'; greater limitations would apply to people with incomes below the maximum thresholds, and when interest rates increase.
2.10
To resolve this issue, the UDIA recommended variable income thresholds across capital cities and regions to reflect income levels required to access housing with serviceable mortgages. This may result in increases in the income thresholds in some areas.
2.11
However, there was not significant support for raising income thresholds. A number of reasons were advanced for lowering thresholds (see discussion below), including to:
reduce the field of eligible borrowers to target low-income earners who would otherwise be unlikely to afford to buy a home;
ameliorate the effects of the scheme on the LMI market; and
reduce the potential for the scheme to be inflationary.
Eligible borrowers
2.12
Many submissions distinguished between two types of borrowers who might be eligible for the scheme:
borrowers who can afford to pay LMI or who would purchase a home at a later stage having accumulated a larger deposit; and
borrowers who cannot save a 20 per cent deposit and can only service a loan if they do not have to pay the LMI premium.
Borrowers who could otherwise afford to enter the market
2.13
Research undertaken by the Grattan Institute found all but the top 10 to 20 per cent of income earners are likely to be able to access the scheme under the generous salary caps. Treasury research similarly indicated around 85 per cent of family units would likely have income below the threshold for the scheme.
2.14
The Australian Housing and Urban Research Institute concurred, stating the maximum income limits would include most persons able to afford home ownership. Modelling undertaken by AHURI on a similar scheme, the first home owners grant, showed the grant would help home buyers to purchase in the short run, but many would have been able to purchase at a later date.
2.15
Obtaining LMI for high LVR loans (a key aspect of the scheme) is not, according to the LMI industry, a major barrier to entering the market for first home buyers. The LMI industry's appetite for risk, and willingness to offer LMI, is wider than that of lenders. This is a consequence of APRA's tightening of lending criteria and banks tightening their responsible lending requirements. Further, LMI adds only $60 per month to the cost of a $400,000 mortgage. The committee was advised the average life of a home loan in Australia is four years, prior to refinancing. At the point of refinancing, LMI may not be required if the borrower has sufficient equity.
2.16
As such, witnesses suggested the scheme may not result in an additional 10,000 home buyers entering the market. It may bring forward the purchase of buyers who would otherwise have waited. In this way, there would be a minor increase or bounce in first home buyers in the early years of the scheme, and a possible raising of prices at the margins, but this would even out over time.
2.17
The committee heard the scheme would need to be tightly targeted to increase the number of first home buyers and to mitigate its potential negative effects. As explained by AHURI's Executive Director, Dr Michael Fotheringham:
The risk is that those who are most able to get the loans are those who will get into home ownership anyway. They have the better documentation, the better deposits, and are able to get there first. There's a further risk that they then start gaming the system and saying, 'I missed out on the round this year; I'll wait until next year,' and not try to pursue home ownership themselves in the meantime…The more it's targeted towards low-income groups or particular needs groups, the more beneficial it will be.
Low-income households
2.18
The committee heard home ownership is falling particularly quickly among young people on low incomes. Home ownership among the poorest 20 per cent of the 25–34 year-old age group has fallen from 63 per cent in 1981 to 23 per cent today.
2.19
The Australian Housing and Urban Research Institute argued the scheme, as currently configured, will not substantially assist lower income households who might not otherwise be able to access the home ownership market. This is despite research from AHURI finding default rates are no higher among lower income groups than higher income groups. Dr Fotheringham stated:
It would be most beneficial if it were targeted to a lower income threshold so that it would help those into home ownership who wouldn't make it there otherwise. It could be targeted to those currently in social housing, to help them move on from social housing into home ownership, or just more broadly to lower incomes.
…the proportion of people getting out of social housing and into homeownership at the moment is very, very low;…the pathway from social housing to homeownership is dormant; and…this scheme [could] be a way to open that out.
2.20
The Community Housing Industry Association similarly suggested the scheme be specifically targeted at households that cannot currently afford LMI or whose parents are not in a position to offer a guarantee. The association made a number of observations about the scheme's detail, including:
income limits are well above median incomes and may result in people who could afford LMI crowding out those who cannot;
there is scope to target households in social and affordable housing who could sustain home ownership; and
the scheme should be promoted to registered community housing providers, a growing number of whom run real estate businesses as social enterprises.
2.21
The committee heard there is capacity among some low-income earners to service a small mortgage. One community housing provider has estimated approximately five per cent of its social and affordable housing portfolio tenants may have the capacity, with support, to transition to home ownership. These tenants are largely in regional areas where house prices are moderate.
2.22
The National Affordable Housing Consortium provided the following figures on tenants in the National Rental Affordability Scheme (NRAS):
approximately 7,000 NRAS households have annual income exceeding $60,000;
over 4,000 of these households have annual income exceeding $70,000;
around 17,000 NRAS households are employed or self-employed; and
in 2018, 15 per cent of NRAS tenants across Australia envisaged they would enter home ownership upon exit from NRAS, and 27 per cent aspired to home ownership within five years.
2.23
The Community Housing Industry Association stated, however, that saving a 5 per cent deposit for a full-price apartment can be difficult for people on low incomes and the scheme could be better targeted by allowing for more flexible ownership arrangements.
Recommendations for targeting of borrowers
2.24
In the absence of detail as to how guarantees would be allocated under the scheme, submitters made a number of recommendations for caps on income and housing price to better target people currently excluded from housing ownership.
2.25
The Grattan Institute recommended closer alignment of the scheme with state government first home-buyer grants and stamp duty concessions. It argued key aspects of the scheme should be specified in legislation, including:
income thresholds for singles reduced to $80,000 and couples to $120,000; and
housing price capped at $650,000, with lower regional limits for different housing markets, and indexed to quarterly movements in national house prices as reported by the Australian Bureau of Statistics.
2.26
The Community Housing Industry Association suggested the scheme might work best for lower income households (particularly in metropolitan areas) if it was combined with other initiatives such as part ownership (shared equity) with a community housing provider.
2.27
The association also suggested there may be scope for discussions between NHFIC and Indigenous Business Australia, whose low-deposit home loan program is oversubscribed, on how the scheme could assist with the additional demand.
2.28
The National Affordable Housing Consortium noted that whilst income caps would need to reflect the ability to borrow and service a modest starter home in different jurisdictions, the income caps for the scheme as currently configured are higher than state/territory caps for housing programs. As an example, in Victoria, the Victorian Treasury/BuyAssist Australia program targets the following incomes:
single people—up to $75,000
couples—up to $95,000; and
families with children—up to $115,000.
2.29
The consortium proposed 10 per cent of the guarantees under the scheme should be reserved for lower income households and that shared equity with community housing providers be permitted. A shared equity provision, according to the consortium, would assist borrowers who have good credit ratings but who cannot borrow sufficient funds for a modest first dwelling.
2.30
The Australian Housing and Urban Research Institute made three recommendations with regard to income, location, and current living arrangements. It stated the greatest need for assistance to purchase a first home is in the lower two fifths of the income spectrum, whilst the current scheme extended to the 80th percentile. It recommended the income cap be cut to the 40th percentile.
2.31
The institute told the committee it is possible to map where the greatest demand for affordable housing is and where rental markets are overflowing. Dr Fotheringham said, 'A geographic spread would make sense. I think if it were largely allocated to inner Sydney and Melbourne it wouldn't be a terribly beneficial program nationally'.
2.32
Dr Fotheringham further recommended people living in social or public housing who want to move into home ownership should be preferenced over those who are renting in the private market.
Impact on the lenders mortgage insurance market
2.33
Submitters pointed to the central role the LMI industry has in supporting the Australian housing market. The industry promotes market accessibility; maintains the integrity of lending practices; lowers the cost of mortgages; smooths the effects of economic cycles; encourages and facilitates competition between large and small lenders; and provides a mechanism to transfer risk outside the banking system.
2.34
A number of concerns were raised as to the potential impact of the scheme on the LMI market. Insurers made the following points:
the government would become a competitor to the LMI industry and offer a free product to some first home buyers;
the scheme under current salary caps would be used by people who would otherwise use LMI to enter the market;
if used by borrowers who could otherwise enter the housing market, the scheme could result in the 'good risks' being taken out of the LMI pool, making the LMI industry unsustainable; and
the scheme could result in higher LMI premiums.
2.35
QBE pointed out LMI generally operates as a community-rated rather than risk-rated insurance product. This means LMI insurers determine the expected loss from the total population of borrowers and share this cost across the premium collected from all borrowers who do not have a 20 per cent deposit. A risk-based scheme would cost more for borrowers or exclude borrowers assessed as higher risk.
2.36
To ameliorate these potential effects on the LMI industry, insurers recommended the proposed cap of 10,000 guarantees not be exceeded and the scheme be targeted to those most in need of support to purchase their first home. It was suggested there should be a focus on rural and regional areas.
2.37
The Insurance Council of Australia further called for the key details of the scheme to be specified in legislation to provide longer-term certainty for the LMI industry.
Lending institutions, financial risk, product details
2.38
Submissions suggested that the manner in which institutions are able to weight risk under the scheme will determine whether the government's intention, that smaller and regional lenders will be prioritised, can be achieved.
2.39
Bendigo and Adelaide Bank stated it is seeking APRA guidance on the credit risk weight that will apply to scheme lending facilities. In particular, it is calling on APRA to set an industry risk weight that:
indicates protection of a guarantee issued by the Australian Government;
supports the policy intent of the scheme; and
ensures a level playing field in cost and pricing for all participants.
2.40
The Australian Banking Association similarly called for APRA to confirm the capital treatment of the proposed guarantee when used as part of a deposit for a standard mortgage.
2.41
Credit Union Australia suggested smaller lenders, whilst being prioritised under the scheme, might ultimately be disadvantaged as a consequence of capital requirements. It is of the view capital requirements for guaranteed loans under the scheme will negatively affect smaller lenders that operate under Prudential Standard APS112 and who are unable to spread risk to the extent larger institutions can.
2.42
The Customer Owned Banking Association called for APRA lending standards to apply to non-ADI (authorised deposit-taking institutions) lenders to ensure competitive neutrality.
2.43
The committee heard there is no detail as yet on products that will be offered by financial institutions under the scheme, and there could be no guarantee against higher interest rates or additional fees for scheme products. The National Housing Finance and Investment Corporation told the committee that whilst some lenders did have risk-based pricing, NHFIC had been advised during consultations there would not be a price impact on the products offered.
Cap of 10,000 guarantees per year
2.44
The Property Council of Australia, representing the interests of property developers, argued for flexibility in the maximum number of guarantees. It stated that that with some amendments, the scheme could be used to boost the construction sector and the economy more broadly.
2.45
The council argued the 10,000 guarantee cap would distort the market in three ways:
some first home buyers are delaying purchase until 1 January 2020 when they can apply for the scheme;
the scheme may be oversubscribed resulting in more 'losers' than 'winners' in the first few years of operation; and
failure to access the scheme in the first round may remove potential buyers from the market until such time as they access the scheme.
2.46
It recommended provisions be made for the first two years of the scheme to allow for an additional 10,000 guarantees each year for the purchase of newly built homes, if required.
2.47
The Grattan Institute disagreed, stating any increase on 10,000 guarantees would be inflationary. It cited research that has shown most of the benefits of schemes to assist first home buyers go to existing home owners and in the long run, first home buyers overall may be worse off. The institute stated:
If the Scheme ‘succeeded’ in rapidly expanding demand from first home-buyers, it would push up prices for everyone, not least all the other first home buyers trying to get into the market. Since the May 2019 federal election, the Australian Prudential Regulatory Authority (APRA) has loosened rules governing how banks assess loan applications, leading to a recovery in house prices in Sydney and Melbourne. And the bigger the scheme, the greater the risks of inappropriate lending that could leave the Government on the hook if buyers default, especially in the event of an economic downturn.
2.48
The Grattan Institute recommended the annual cap of 10,000 guarantees, in addition to property price caps and income caps, should be specified in the legislation.
2.49
The Australian Housing and Urban Research Institute, however, recommended a flexible cap controlled by an appropriate approval mechanism that could take into account the prevailing market and countercyclical investment.
Scheme complexity
2.50
The Property Council of Australia argued that under the arrangements foreseen in the EM, there will be at least 16 different price caps across the country. Further, these will be constantly changing as median house price data is updated. As a solution, the council recommended the price caps be harmonised to first home buyer caps in each state and territory.
2.51
The Grattan Institute agreed price caps should be aligned with those used in most state/territory government first home buyer grants and stamp duty concessions. It further recommended the cap on home values be legislated in order to prevent the 'considerable risk of "scope creep"'.
Proposed research function
2.52
The Australian Housing and Urban Research Institute noted the lack of publicly available evaluations of the effectiveness of first home buyer schemes and welcomed the bill's addition of a research function to NHFIC's operations. It suggested the research mandate should include not only supply, but also demand (underlying, expressed and projected), and a nuanced consideration of stock type and quality in the macro and micro housing market. This would help fill the gap in research created when the National Housing Supply Council was discontinued in 2013.
2.53
The institute argued for NHFIC's research capability to be led by an appropriately qualified council involving leading experts from sectors including property, construction, urban planning, social housing, finance and economics. It suggested some commissioned research might include:
measuring the social impact of NHFIC’s bond loans to social housing providers, so the true benefits of the investment are understood (the institute has now been commissioned by NHFIC for this research);
modelling of risks to lenders of default under the First Home Loan Deposit Scheme;
evaluating intervention on housing outcomes for low- and middle-income households of guarantee schemes; and
assessing impacts of the schemes on consumers and wider stakeholders.
2.54
The Housing Industry Association also called for NHFIC's research role to be focussed more broadly on undertaking research and coordinating data on housing supply in Australia, across all jurisdictions. It recommended the bill be amended to specify 'housing supply' rather than 'housing affordability'.
Scheme detail—legislation, regulation and finer scheme detail
2.55
Many submitters and witnesses acknowledged the current lack of detail about how the scheme will function, including: who will be eligible; how the scheme will allocate guarantees to borrowers and lenders; arrangements for when property purchases are not subsequently finalised; what the housing price caps will be; how the panel of lenders will be chosen; and what the terms of loan products offered under the scheme will be, in particular whether the products will be more expensive for borrowers and whether they will be transferable.
2.56
Treasury advised the committee that people who could otherwise service a loan but could not save the deposit in a reasonable period of time would be eligible for the scheme if they meet other eligibility criteria, and the scheme would preference smaller lenders.
2.57
The committee heard the broad details of the scheme would be provided in regulation and the NHFIC Board would be responsible for the subsequent development, implementation and operation of the scheme. The National Housing Finance and Investment Corporation will also contract with lenders on the panel of lenders. However, the delineation between information in the Investment Mandate and that to be provided later by NHFIC is not clear.
2.58
The committee heard The Treasury and NHFIC are continuing to consult industry on the details of the scheme, but a range of requirements would be specified in NHFIC's existing Investment Mandate, including:
cap on 10,000 guarantees per financial year (subject to any subsequent decision by the minister);
regionally-based house price caps for modest dwellings;
definition of eligible first home buyer, including Australian citizenship and purchasing property within Australia;
parameters under which lenders are appointed to the panel and whether there is any portability of the guarantee; and
details of NHFIC's research function.
2.59
The Treasury stated having these parameters in regulation rather than primary legislation would allow changes to be made quickly when ongoing monitoring mechanisms identified unintended consequences and other issues requiring resolution. Further, the split between legislation and regulation is consistent with the way NHFIC's broader remit has been drafted.
2.60
The Treasury acknowledged the time frame for operation of the scheme is tight. The legislation is yet to pass the Parliament; consultation on the Investment Mandate has not been completed; and NHFIC is engaged in a market-sounding process. However, it advised the committee a range of ADIs and non-ADIs are keen to participate in the scheme and have indicated they can meet the proposed starting date of 1 January 2020.
Monitoring and review
2.61
The Treasury emphasised there would be ongoing monitoring of the scheme. Further, there will be an independent review of the scheme after the first three years of operation. However, no further information is currently available on how this review will occur or by whom it will be conducted.
2.62
The committee heard support for the review given its importance to determining whether the scheme has been effective in achieving its purposes.
Committee view
2.63
The committee is of the view the scheme will contribute to assisting some first home buyers enter the housing market, noting that the government anticipates that the scheme will complement the private LMI sector.
2.64
While many submitters commented on the scarcity of specific details of the scheme's operation, the committee acknowledges the need for flexibility to modify the scheme to suit the circumstance of the sector. This said, the committee is comfortable with the scheme's specific details being included in the NHFIC Investment Mandate.
2.65
The committee also notes that greater monitoring and data collection through the expanded NHFIC research function will also assist NHFIC to direct its resources effectively.
2.66
The committee recommends that the bill be passed.
Chair