Chapter 9 - Current and proposed schemes to increase home ownership
First Home Owner Grant (FHOG) Scheme
9.1
When the FHOG was introduced in July 2000, it paid $14 000 to first home
purchasers of new dwellings and $7000 for the purchase of existing dwellings.
The scheme now offers $7000 for all first home purchasers. Responsibility for
its $1 billion cost has been transferred from the Australian government to
the states.[1]
9.2
The Urban Development Institute of Queensland noted that while the FHOG
provides substantial assistance to new entrants to the housing market:
the comparative value of the subsidy...has...been substantially
eroded to such an extent that it is now equivalent to less than 2 per cent of
the purchase price of an average new home.[2]
9.3
A few representatives of the property sector called for the FHOG to be
increased and/or indexed to further rises in house prices.[3]
9.4
The majority of witnesses before the inquiry argued for the FHOG to be
restricted. For example, Professor Disney said the FHOG 'should have been means
tested or limited to houses of certain value'.[4]
ACOSS said 'if the scheme is going to remain, to get the maximum benefit for
return it needs to be targeted at low-income and disadvantaged Australians'.[5]
9.5
Shelter WA thought it unfair that people who had previously owned a
house in Australia were ineligible for a FHOG but people who had previously
owned a house overseas could still receive it.[6]
9.6
Other concerns about fairness were also raised:
You are only eligible for that [grant] once. So, if you have
experienced a domestic violence situation and have had to leave your home, you
are not eligible for another grant. That applies if you are a single person
going back into homeownership, part of a family or part of a couple, having
gone into another relationship.[7]
9.7
The scheme also rules out the strategy of young adults buying an
apartment or smaller property and renting it out for a few years to pay off a
portion of the mortgage before moving in.
9.8
Moreover, the FHOG was criticised as driving up house prices, raising
questions about its effectiveness. The Productivity Commission has commented:
Measures that increase purchasing power will tend to increase
house prices, particularly if there is limited capacity to augment supply in
response to the ensuing increase in demand. This will benefit existing home
owners at the expense of those seeking to purchase, including first home buyers
– though recipients of assistance will still be better off overall.[8]
9.9
This is also the view of a number of academics who gave evidence to the
inquiry, and a diverse range of other witnesses, from the Planning Institute to
the Australian Association of Social Workers.[9]
9.10
The Reserve Bank also criticises similar concepts:
it is now widely accepted that policies that simply give people
more money to spend on housing are likely to be capitalised into higher housing
prices.[10]
9.11
Economics journalist Ross Gittins explains why increasing the FHOG, and
similar schemes, appear an attractive response to affordability problems but
would actually be counterproductive:
All these measures would work if you were the only person who
benefited from them. That is why they sound like they would help. But
because all the other would-be home buyers you are competing against also
benefit, the attempt to make prices more affordable ends up pushing them
higher.[11]
9.12
The UDIA criticises opponents of the FHOG by alleging that they do not
oppose other policies which raise house prices.[12]
The Real Estate Institute argues 'you would be hard pressed to argue that a
$7000 handout to 14½ per cent of the marketplace has led to a $241 000 price
increase'. The committee has not received evidence that it would add $241 000
to house prices. Rather, the issue raised is what it does add to house prices. Under
questioning Master Builders Australia acknowledged 'perhaps it has been
capitalised into housing prices'.[13]
9.13
The FHOG was introduced at the same time as the new tax system which
included the GST. The MBA continues to justify it as 'a compensation for the
GST'.[14]
However, the GST applies to the construction of new houses regardless of
who buys them while the FHOG is paid to first home buyers, the vast
majority of whom buy existing rather than new homes.[15]
9.14
The committee believes there are solid grounds to amend the FHOG,
particularly given the added assistance of First Home Saver Accounts (see
below). The FHOG would contribute more to improving housing affordability if it
provided an incentive to increase the supply of houses rather than just
increasing the demand for them. This could be done by reverting to the scheme's
original structure, which gave a larger payment to purchasers of new dwellings
than purchasers of existing dwellings. This could be achieved by reducing the
current amount given to first home buyers of existing dwellings while
increasing the current payment to first time purchasers of new dwellings. Given
that the vast majority of first home buyers purchase existing houses, this
amendment may add to revenue which can help fund the measures to increase
affordable housing discussed in chapter 10.
Recommendation 9.1
9.15
The committee recommends that the Australian Government should increase
the First Home Owners Grant Scheme for those buying new dwellings and lower it for
buyers of existing dwellings. Any funds saved should be directed towards
measures to increase the supply of affordable housing.
First home saver account scheme (FHSA)
9.16
In February 2008, the Australian Government announced its intention to
introduce a FHSA for those saving to buy a first home. The scheme is intended
to be a tax effective way to save a deposit for a first home through a
combination of a government contribution and a low tax rate. Under the scheme,
the Government will pay a contribution in addition to that paid in by the
individual. The investment earnings that accrue in the accounts will be taxed
at 15 per cent, while withdrawals will be tax free where they are used to
purchase a first home in which to live. The account is capped at a limit of $75
000 (which will be indexed).
9.17
The details of the scheme, announced in the Budget after the committee
had completed its hearings, differ somewhat from the initial proposal. Some of
the comments the committee received may therefore no longer be applicable. The
start of the scheme was deferred to October 2008.
9.18
Some aspects of the scheme are widely praised, such as the encouragement
for households to save more and build a deposit. This may help build a culture
of saving. As Abacus, representing building societies and credit unions, put
it:
Instilling a savings habit in a prospective borrower is valuable
preparation for servicing a loan and any equity for a first home borrower via a
deposit provides a buffer against a fall in house values.[16]
9.19
Abacus also hoped that the scheme could smooth house prices:
The present system of disadvantaged taxation treatment of the
accumulation of the first home deposit is likely to encourage impatience at
those times when house prices are rising most rapidly. When the aspiring first
home-owners can see that in after-tax terms their house deposit accumulations
are growing at a healthy annual rate, they might be expected to act with
greater patience during periods of over heating in house prices generally. By
this means the First Home Saver Policy would then be expected to have some positive
‘smoothing’ effect in terms of new residential construction spending and
construction activity across the Australian economy.[17]
9.20
There were three concerns expressed about the scheme, two of which have
at least partly been addressed by the government's modifications. Firstly, the
scheme was criticised for being too complex. Among witnesses calling for it to
be simplified were the Australian Bankers' Association, representing the banks which
will be expected to administer the accounts.[18]
Abacus, representing building societies and credit unions, also warned that:
Optimising the FHSA initiative will require FHSA products that
are attractive to, and understood by, young people. Each additional layer of
complexity in the regulatory framework will reduce returns to savers, dampen
competition and choice, and slow the arrival of FHSA products to market.[19]
9.21
The changes announced in the Budget go some way to addressing these
concerns by simplifying the government contribution, clarifying the rules and
providing for a simplified disclosure statement.[20]
9.22
Secondly, it was called unfair, as in the initial formulation the
government made larger contributions for savers in higher tax brackets.[21]
The final version in the budget addresses this criticism to a degree. Instead
of the government contribution being tied to the marginal tax rate (meaning
that low income earners received a maximum contribution of $750 a year while
high income earners could receive $1500), the government now contributes 17 per
cent on the first $5000 of private contributions (a maximum contribution of $850)
for all.[22]
9.23
Finally, there were concerns that, similar to the FHOG, it will lead to
higher house prices.[23]
However, this will not happen immediately. 'No demand stimulation will occur
for at least four years, that being the minimum saving period before draw-down
of the accumulated savings.'[24]
Ideally, this gives time for measures to boost supply to take effect before the
demand stimulus from the scheme hits the market.
State government assistance
9.24
State governments' stamp duties are discussed in the first part of
Chapter 7. As noted in Table 7.1, the governments mostly offer some concessions
on stamp duty to first home buyers.
9.25
Some state governments have concessional loan schemes. For example, Keystart
in Western Australia was launched in 1989 to provide home loans to low income
earners, and in 2006–07 over 3000 applicants, about a third of which were first
home buyers purchasing new homes, shared in $381 million.[25]
A list of state lending programmes is given in Australian Institute of Health
and Welfare (2008a).
9.26
The ACT government's Land Development Agency makes a portion of its
serviced land available to specific sectors of the market, such as first home
buyers.
Shared equity schemes
9.27
A recent innovation to help people into home ownership is 'shared
equity' schemes, with equity injected either from a private bank or a
government agency. It is important that these shared equity models are targeted
to only support affordable housing—to prevent applicants merely seeking to bid
up to bigger houses.
9.28
A private sector scheme is offered by Rismark International in
conjunction with Bendigo & Adelaide Bank. As an example of how it works, a house
purchase may be funded with 20 per cent 'equity' (ie deposit) from the homebuyer,
20 per cent equity from a bank and 60 per cent the usual loan from the bank.
This means that the bank shares in both capital gains and losses. The Bank
described the scheme as follows:[26]
When that property is then sold, the loan would be discharged,
the owner would get their percentage share of the equity in the sale and the
bank would take its percentage share of the equity in the sale.[27]
9.29
Mr Christopher Joye, the CEO of Rismark, noted that:
It is available in all metropolitan areas in mainland Australia.
We expect to extend it to Tasmania shortly. The product is targeted right
across the life-cycle spectrum, from first home buyers to upgraders,
refinancers and those who want to release equity from their homes... the average
property value is around $494 000—which is slightly above the median house
price in Australia.[28]
9.30
The scheme has not become widespread, and may need the involvement of
superannuation funds for this to happen:
The problem that we have...is that those assets are not really
appropriate assets for a bank balance sheet because the cash flow associated
with them is lumpy and it comes in at the end when people decide to sell the
home...What we really need to be able to continue with those products is access
to patient capital that does not have the same cash flow demands as a bank
might have.[29]
9.31
Shared equity packages are sometimes offered by governments. The ACT
government explains:
Shared equity is also being sponsored. Housing and Community
Services ACT are introducing shared equity...for people whose incomes are rising
and who we want to encourage into that stream. Community Housing Canberra is
also following that up and we are encouraging private schemes as well.[30]
...a product that will allow them to purchase 70 per cent or more
of the property and we will take a second mortgage on the remaining 30 per
cent. That makes the title issue easier for the banks to deal with, and
certainly that is the financial advice that we have received. The usual
borrowing rules would apply, so the bank would come in and make an assessment
to see whether the tenants are able to meet the repayment requirements. As the
process is gone through, we will just test their income on an annual basis to
see whether they should be purchasing more of the property off us. We will not
charge them rent on the remaining 30 per cent; however, we will expect them to
undertake full property maintenance and to pay all rates and outgoings for the
property.[31]
9.32
The WA Government introduced a shared equity programme in April 2007
called 'First Start'. The Government has committed $300 million over three
years to the scheme, which will involve equity of up to 40 per cent of the
value of the house. The scheme is restricted to households with incomes below
$70 000 and houses priced below $365 000.[32]
The home owner is allowed to increase their equity share in the home over time
by buying it from the government. In its first year of operations 1100
applications were approved.
9.33
Shared equity schemes received some guarded support from the real estate
industry:
We do support the use of shared equity products but to a limited
extent. We would say that they can be an important component of the
marketplace.... Certainly they are growing, and we think that if those products
can help persons who would otherwise not be able to afford to purchase a home
get into the market then they have a role to play...we would have concerns if
this were to become a mainstream lending product. If anyone could rock along
and say, ‘I was going to buy a three-bedroom home but instead I am going to buy
a four-bedroom home,’ and simply increase the amount that they borrow to fund
that, we would caution against it. Suddenly there is more demand in the
marketplace for larger homes. People are essentially bidding up prices.[33]
9.34
Less enthusiastic was John Symond:
I do not believe that that is something that will work when you
analyse the value and benefits to a consumer. I believe that the lending
conditions in this country have been so lax that you really had to be in a
desperate credit worthiness state not to be able to borrow money to get into a
property. This is going back pre credit crunch. I am not a fan of it and I do
not believe it is good value for homeowners. They need to control their own
destiny.[34]
9.35
However, there are legitimate concerns that shared equity schemes must
abide by this central purpose and should not become a vehicle for home buyers
to demand bigger and more extravagant homes. It is important that these shared
equity models are targeted to ensure that affordable housing is promoted and to
prevent applicants from bidding for bigger houses. This could be achieved by
capping the value of the property and/or means testing applicants. It is
arguable that these schemes are better suited to public or not-for-profit
models, perhaps with the backing of super funds. Various types of limited
equity cooperative are used extensively and have worked well in parts of the United
States.[35]
Land rent scheme
9.36
The ACT government explained its scheme:
Land rent is essentially where the government
keeps the economic value of the land and rents out the land. If we take a $300 000
house, 45 per cent of households could purchase that. The mortgage that you pay
for the land is $260 a week. This was worked out on a slightly different
interest rate. The land rent would drop that from $260 to $61 a week and so 70
per cent of households could now buy the same house but rent the land. If we go
to our compact product you will see that you need an income of $33 000, so 80
per cent of households can now buy a $100 000 house on a small block. That is,
again, attacking this affordability gap.[36]
9.37
The land rent scheme has some similarity with the
shared equity scheme, in that 'the ACT government retains the equity in the
land, the purchaser takes on the equity in the house'.[37] As the scheme is novel, it
will be important that participants understand it. An education programme is
being developed with Canberra Institute of Technology to ensure this.
Mortgage corporation—'AussieMac'
9.38
The creation of 'a public institution that can render
liquidity' to the market for securitised mortgages was also proposed to the
committee by Mr Joye.[38]
It is based on a similar institution in Canada, and bears some similarity to
the longstanding 'Freddie Mac' and 'Fannie Mae' in the United States.[39]
9.39
The suggestion was endorsed by John Symond, who was
concerned that a drying up of liquidity in the securitised mortgage market
risked a return to the situation before the 1990s when a handful of banks were
almost the only providers of mortgage finance and the margins charged home
buyers and investors were consequently considerably higher.
9.40
He elaborated:
Christopher Joye’s suggestion to copy the Canadian
mortgage backed security model has a lot of merit. I would probably tend to
believe that we need a government supported liquidity initiative. The Canadian
model would have been explained to you but they have not been impacted by the
global credit crunch. Homeowners in Canada still have affordable interest
rates. They are not out of money. We may find that, if funds start to get
rationed in this country, it will be a serious problem for everybody not just
homeowners... I am fully supportive
of a government supported liquidity initiative and I do hope that the government
has a hard look at that.[40]
9.41
The mortgage corporation was also supported by the
Construction, Forestry, Mining and Energy Union, on the grounds that it would
'preserve competition in the home mortgage market (a critical element in any
affordability solution)'.[41]
9.42
A critical view was put by Professor Sorensen:
These are developments of Freddie Mac and Fannie Mae, which
exist in the United States. They are mortgage providers. I actually think that
the financial side of the housing system that we have is pretty well catered
for in Australia. One of the events of the last five years and one which has
actually propelled housing prices higher is the advent of a variety of
secondary mortgage lenders, who did a very efficient job in forcing down
interest rates for home borrowers but, in so doing, enabled them to pay more
for housing with the budgets that they had, and that underpinned at least part
of the rise in house prices. I am not sure that we need similar agencies to
those in the United States.[42]
Recommendation 9.2
9.43
The committee recommends that Treasury examine
the international experience with a securitised mortgage scheme and its
application to Australia with a view to determining whether an 'Aussie Mac'
style product would be beneficial in the Australian market.
Calls for further tax concessions
9.44
The WA division of the Urban Development Institute advocated further tax
concessions for housing, namely 'that first home buyers be given full tax
relief on their interest payments when they buy a property, established or new,
to the value of $450,000 and that the tax deductibility is for the first five
years'. The committee is not aware of a costing of this proposal. It could be
substantial, especially if it encouraged households to borrow more and put
pressure on house prices. Mortgage interest on owner-occupied housing is an
allowable tax deduction in Switzerland and the United States, but Switzerland
taxes capital gains on owner-occupied housing (Table 4.3).
9.45
John Symond proposed a more targeted plan for interest deductibility,
only applying to new dwellings:
a tax incentive for the first five years of $15 000 per annum of
their income; that it would be a tax deduction...During that first five years, it
would give a young couple a chance to start a family—they may be one income
down while they have children—and in the five-year period after that initial
five years they would repay half of it, in a similar way that HECS works.[43]
9.46
A suggestion was made for a tax concession to
facilitate downsizing, as a means of opening up large homes for families:
At present, the downsizing from a traditional home
to a unit, for example, has financial implications, and unless this is
addressed many people will simply stay put. However, these existing homes may
be affordable and ideal for a young family, hence this could have a domino effect
within the community. It is worth considering state and federal taxation
initiatives to downsize. Side benefits of reduced energy costs and smaller,
smart dwellings would also flow.[44]
9.47
A preferable way of achieving the same goal may be
to move from stamp duties towards tax systems that do not tax transactions, as
discussed in chapter 7.
Assistance to keep people in home ownership
9.48
There have been calls for more programmes to help
people at risk of falling out of home ownership due to changes in income, typically
the result of unemployment or relationship breakdown. Professors Burke and
Hulse note that 'there is no national programme of assistance in such
circumstances yet when they drop back to rental they can, in most
circumstances, avail themselves of Commonwealth Rent Assistance.'[45]
9.49
Homeowners struggling to meet mortgage payments to stay in their
homes account for about a fifth of families being counselled under the HOME
Advice Program, which also provides limited financial assistance. As most of the
programme's clients are renters, the scheme is discussed in the following
chapter (see recommendations 10.8 and 10.9).
9.50
There have been increasing media reports of families accessing
superannuation to meet mortgage repayments.[46]
This is a disturbing trend as there is a large risk that households will use up
the superannuation in a vain attempt to keep up mortgage payments, just
delaying accepting that their mortgage is unsustainable and the home will have
to be sold. They then risk entering retirement with neither a home nor
superannuation.
9.51
Professor Sorensen opines that:
The squandering of such [superannuation] savings in a falling
market to keep people in homes they have mistakenly bought at excessive prices
is stomach churning.[47]
9.52
A helpful initiative of one credit union which may
help some families avoid getting into difficulty is a 'pause feature', under
which borrowers can cut repayments by 50 per cent for six months during
maternity/paternity leave.[48]
9.53
The Bendigo and Adelaide Bank told the committee
that their approach to home loan lending goes beyond the initial loan, working
with mortgagees to make repayments throughout the life of their loan:
We also think about the issue of our role beyond that initial
purchase. It is not about completing a sale; it is about a relationship that is
likely to endure for a good, long period of time. So the responsibility of
preparing ourselves, even in changed circumstances, is equally important. It is
not the sale of the product; it is the effectiveness of the product over the life
of that product. We have structures—although they have not been tested in the
last few years—like mortgage help centres and customer help centres, which are
very much about trying to talk to people if stresses emerge so we can actually
help them through those difficult times and perhaps develop strategies before
the problem becomes more serious. We see banks and their role as being very,
very important, particularly those banks that focus very much on relationship
and community connections, because this gives us the opportunity to play that
larger role in partnership with those communities and customers in achieving
their aspirations.[49]
9.54
The committee strongly supports this approach and encourages other
lending institutions to adopt a similar approach.
Recommendation 9.3
9.55
The committee recommends that the Commonwealth government increase
support for home owners to undertake counselling to improve their financial
literacy before they are allowed to access their superannuation to make
mortgage repayments.
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