Homebuyers weigh up Coalition’s home guarantee scheme, Labor’s Help-to-Buy

The election has produced a basket of promises on home ownership incentives – but buyers face a very different outlook to recent years.

The current government’s guarantee scheme has helped thousands avoid costly mortgage insurance.

Prospective homeowners weighing up the merits of the Coalition’s home guarantee scheme and Labor’s proposed Help-to-Buy scheme are facing a very different housing outlook to recent years.

The appeal of these home ownership schemes – wafer-thin deposits – is now looking a lot riskier amid expectations of double-digit falls in the property market as rates push higher. They also do little to address the underlying issue of housing affordability, economists say.

The federal government’s most popular scheme – the first-home buyer guarantee scheme – allows potential homebuyers earning $125,000 or less ($200,000 for couples) to purchase a home with a deposit of only 5 per cent.

Under a sister scheme, single parents can qualify for a loan with a deposit of as little as 2 per cent, while a third option supports eligible homebuyers to purchase in regional areas.

Labor, if elected, has proposed something quite different: a Help-to-Buy scheme that would see the government chip in up to 30 per cent of the purchase price for existing properties and up to 40 per cent for new builds, giving low to middle-income earners a leg up on the property ladder. The scheme would initially be capped at 10,000 places a year.

Borrowers would not pay rent on the portion of the property the government owns but when it comes time to sell, the government will get back its equity, alongside any capital gains on its portion of the home, assuming there are any.

To qualify, borrowers need to earn less than $90,000 a year – $120,000 for couples – and must have a deposit of at least 2 per cent. They would not be required to pay lenders’ mortgage insurance and don’t need to be a first homebuyer, but they can’t own property at the time of purchase.

Labor’s scheme has higher price caps in Sydney and Melbourne ($950,000 and $800,000 versus the Coalition’s $900,000 and $800,000), but lower price caps in all the other major cities.

The current government’s guarantee scheme has been successful in helping thousands avoid costly mortgage insurance – it has also recently been extended to 35,000 places a year.

But it is a short-term fix that does little to address the bigger ­affordability issue, RateCity research director Sally Tindell says.

“The problem with the schemes now is that property prices have continued to run away from both the government and first-home buyers,” Tindell says.

“And while the government has upped the property price cap on the guarantee scheme, it’s like putting a Band-Aid on a bullet wound: it’s doing nothing to address the core issue, which is that property prices are too high. They’re just encouraging people to take on more debt.” Anyone looking to buy now is in a much more precarious position as rates push higher and property prices head lower, she warns.

“Someone that bought in 2020 (through the scheme) would have seen significant growth in their property’s price,” she says.

“But the outlook at this very point in time could not be more different. We are staring down the barrel of a series of rate hikes.”

The Reserve Bank on Tuesday lifted the official cash rate for the first time in more than a decade, by 25 basis points, and indicated a cash rate of 2.5 per cent by late next year.

For borrowers, that means variable mortgage rates are headed to well in excess of 4 per cent or 5 per cent at least, potentially higher if the banks lift rates out of cycle.

That is unless Clive Palmer’s United Australia Party is somehow successful in exerting influence in the next government and follows through on its far-fetched promise to cap home loans at an interest rate of 3 per cent for the next five years.

Home ownership schemes that require minimal deposits are more risky in this uncertain environment, CoreLogic head of research Tim Lawless says.

“A lot of people getting into the market using these schemes will probably continue to pay down their debt responsibly and get a roof over their heads,” he says. “So there is some merit to these sorts of programs, but they don’t do anything to address affordability, probably their biggest flaw.”

Housing Industry Association chief economist Tim Reardon, who does not see house prices at risk of major declines, says negative equity is not an issue in the short term as long as borrowers are able to service mortgages.

“The key issue isn’t negative equity, it’s unemployment. While unemployment remains at 4 per cent people will be able to service their mortgage,” Reardon says.

The biggest risk in the market is undersupply, he notes.

“The ALP policy is just 10,000 grants initially, and that is the right way to commence intervention into the housing market so they can refine the program to ensure it is not having a distortionary impact,” he says. “We have state-based schemes, such as WA’s Keystart, that have shown over the course of decades that they have a role to play.”