Reserve Bank flags risks in Labor’s 5 per cent deposit scheme
Reserve Bank governor Michele Bullock has cautioned that Labor’s expanded first-home buyer program could increase financial risks for borrowers and leave taxpayers exposed to defaults.
Labor’s new scheme to allow all first-home buyers to enter the property market with just a 5 per cent deposit threatens to expose more borrowers to riskier loans, Reserve Bank governor Michele Bullock has warned.
Appearing before Senate estimates on Friday, the central bank chief also noted that the expanded deposit program would leave taxpayers to bear the cost of any defaults, as new borrowers took on larger debts and higher repayments.
“They still have a much higher loan-to-valuation ratio, which means that if they find themselves in difficulty … there’s a risk the property may not cover the loan,” Ms Bullock told senators.
“When you’ve got a high loan-to-valuation ratio, it doesn’t take … as much for housing prices to decline and you’re in negative equity – that’s the main concern.”
Labor’s expanded First Home Guarantee Scheme, which came into effect earlier this month, allows first-time buyers to purchase a home with just a 5 per cent deposit and avoid paying lenders’ mortgage insurance – normally required when a borrower has less than a 20 per cent deposit.
But the program, which was first introduced by the Morrison government, no longer has eligibility caps that confined it to low-income earners, while the scheme’s property price thresholds have also been dramatically increased.
The government has previously rejected claims the guarantee will encourage first-home buyers to take on riskier loans, arguing that any rise in defaults will be minimal and borrowers will still be required to meet existing serviceability requirements.
A bevy of economists, property analysts, housing policy experts and even Treasury predict the policy will add further pressure to prices despite its stated aim of improving affordability.
Questioned about the policy’s effect on house prices, Ms Bullock said it was “possible that housing prices might be a bit higher than they otherwise were,” though any impact would depend on how quickly new housing supply entered the market.
Ms Bullock expressed doubt that borrowers would flock to government-backed loans, pointing out that many were wary of stretching their budgets to meet repayment obligations.
“Will everyone rush in and immediately go and take 95 per cent loan to valuation ratios? I’m actually not sure they will. Some will, but I still think a large portion will think before they borrow up to the maximum allowed,” she said.
Asked about Ms Bullock’s comments after he toured a social housing development in the Brisbane electorate of Griffith on Friday, Anthony Albanese blamed the “neglect” of previous governments for elevated house prices.
He also criticised Michael Sukkar, the Coalition’s former housing spokesman, alongside his Greens’ counterpart Max Chandler-Mather, who were both ejected from parliament at the recent May election. “Michael Sukkar and the former member here (Mr Mather), both are no longer in the parliament,” the Prime Minister said. “I think one of the reasons why they’re no longer in the parliament is because they blocked housing supply, and people rejected that.”
Opposition housing spokesman Andrew Bragg, who led the Coalition’s questioning of Ms Bullock over Labor’s expanded Home Guarantee scheme, said the policy was “driving up house prices for first-home buyers”.
“They are killing the dream for younger people,” Senator Bragg said. “They are also sending the bill to taxpayers who must now fund this stupidity.”
Earlier, Ms Bullock rebuffed accusations that the central bank’s pandemic-era quantitative easing program had inflated house prices, saying she “would not accept” the assertion.
“The problem is the lack of supply relative to demand, and when monetary policy eases and housing demand picks up, supply can’t pick up as quickly,” the governor said.
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