Generous government incentives risk herding homebuyers into overpriced property

A new generation of property buyers risks paying too much for a first home as state government incentives, described by some as ‘outlandish’, hit the market.

State grants already affect auction activity and buyers “stop dead” once a grant threshold is reached. Picture: Julian Andrews

A new generation of property buyers risks paying too much for a first home as a torrent of government incentives hits the market.

In what’s been described by a veteran property analyst as “outlandish”, the Queensland government is offering what it’s calling “a nation-leading program” which lets a buyer with a deposit of just 2 per cent to purchase a $1m home.

At the same time the federal government is launching a universal “First Home Guarantee” scheme whereby any first-time buyer automatically qualifies for the nationwide program; and most buyers would only need a 5 per cent deposit.

Cameron Kusher, a former senior analyst with both CoreLogic and REA, tells the latest Money Puzzle podcast: “I feel like this is a slippery slope. These schemes only encourage more people to buy at high prices.”

The government schemes arrive just as the housing market is showing signs of splitting into two tiers: high flying stand-alones worth more than $1m are rising while lower entry points, which are dominated by first-home buyers, are recording losses.

Prices for apartments and units, which are a common stepping stone for first-time buyers, have been exceptionally weak in the larger cities.

A recent report from Cotality has revealed deep losses in the apartment market. In the three months to March, 90 per cent of loss-making sales in Sydney were apartments, while one in five of Melbourne’s apartments was sold at a loss.

“At the end of the day it is not actually increasing home ownership rates,” Kusher says.

Kusher Consulting’s Cameron Kusher.

“Do we next get to the point where there is a zero deposit where you would not have to put any money down? … Every time you know they have to go with something bigger and more outlandish.”

Buyers’ advocates are already noting how government incentives are distorting activity in the auction market.

Jarrad McCabe of the Wakelin Group says state grants already affect auction activity and buyers “stop dead” once a grant threshold is reached.

As McCabe points out, there is no mystery to the process. Homebuyers and investors know the grant limits and play the game accordingly.

Typically, homebuyers stop at the top of the grant range while investors know there is better value just above the limit, where the same market distortions ensure that competition falls away.

“You can be better off forgoing that little bit of extra free money and buying a better property instead of paying over the odds,” McCabe says.

In other words, the flip side of a distorted market, which artificially corrals buyers into tight price bands, means investors will find new opportunities.

In Sydney, the nation’s most expensive market, the federal government’s First Home Guarantee cuts out at a home value of $900,000, meaning investors will find better value immediately above that level.

Home-loan incentive programs clearly help, but they also make homes more expensive – especially in the segment of the market where they are most commonly used.

“It looks good, but it’s not really addressing the slide in home ownership we are seeing,” says Kusher, who is now a director of Kusher Consulting.

The latest and most generous home incentive deal is offered by Queensland’s Crisafulli government. Under this scheme, the state government takes an equity stake of up to 30 per cent in new homes valued up to $1m but only requires a deposit of 2 per cent.

Meanwhile, the “caps” for the federal government’s universal First Home Guarantee scheme range from as low as $450,000 in regional areas to $800,000 in Melbourne, and $950,000 in Sydney.

Originally published as Generous government incentives risk herding homebuyers into overpriced property