Widening deposit gap hits home: first-time buyers need more help than just their parents

A property market where prices have risen more than 20 per cent in a year is undermining home grants and demanding more from parents.

With prices continuing to inch higher, parents may only guarantee a portion of the loan to avoid the need for mortgage insurance.

Talk about inflation! This week the federal government released the latest batch of housing assistance grants. As mortgage brokers went to work flogging “government-guaranteed” loans to new home buyers, the corrosive effect of last year’s record-breaking house price surge hit hard.

Put simply, the purchasing power of so-called Government-Guaranteed Home Loans, where first-home buyers can buy a house with a deposit of only 5 per cent, have been sliced back by about one-fifth: a borrower might still only need a 5 per cent deposit, but the price of the house is probably 20 per cent higher than it was when the scheme began in 2020.

The sudden dilution of the most successful of the government home loan assistance schemes points to a bigger problem that has now deepened: first-home buyers – and anyone seeking to help them – are losing the battle of the deposit gap.

What’s more, only a select few can now hope to get into these government guarantee schemes: as the wider efforts in this area phase out, there are fewer than 5000 loans available under the latest ­release.

But the pressure to help kids buy a house remains intense: first-home buyers are competing afresh with investors who have come rushing back into the market. In the blink of an eye, investors are again taking more than one third of all houses sold.

As we have come to expect, Sydney offers the most extreme example. Typically, anyone trying to get into the market will need a 20 per cent deposit – the median home price in the city jumped the highest of all regional markets in 2021, rising by 25 per cent to $1.1m.

In order to crack the Sydney market, buyers will need a deposit of $220,000. There are very few first-home buyers who can muster that sort of money without help.

What’s more, it’s long been a mug’s game waiting for house ­prices to fall (of course they can fall, historically for short periods).

The talk at the tail end of 2021 was about how rates would rise and house prices would fall as they lifted. Sure, in theory this may happen eventually. But there is no sign of it happening just yet. ­Neither was there any sign of the RBA moving to lift rates in its first meeting of the year this week. Until that happens, the fundamentals pushing the market higher remain in place.

Looking at the latest house price numbers (over the 12 months to January 31), the facts of the matter are that house prices are still rising: They are now up nationwide by 22.4 per cent over the last year and that is the strongest 12-month performance since 1989.

House prices rising at a slower rate are not to be confused with house prices declining. We have seen enough evidence of incorrect forecasting not to rely on anything other than hard data from the market, which as one key report mentioned this week “surprised on the upside” in the four weeks to January 21.

When house prices were still attached to the reality of wages, many parents helped their children buy a first home through ­direct cash gifts. Gifting does not get taxed, and nor does it get reported, which ensures it has an ­enduring appeal.

Similarly, interest-free loans are becoming popular.

Talking to a range of financial advisers this week about the dilution of deposit power, it was surprising how many now are recommending parental guarantees to help their families get into the market.

Under a parental guarantee, the parents put up equity in their home as collateral and guarantee the bank the mortgage their children have taken out will be paid back.

The great advantage here is that, unlike a cash deposit which is losing its power by the day, the guarantee is linked with rising property valuations.

With prices continuing to inch higher, parents can only guarantee a portion of the loan so that mortgage insurance need not be paid by the borrowers.

One last thing: the first company to crack a formula that will allow first-home buyers to enter the market without having to vault the hurdle of a 20 per cent deposit will make a fortune.

That is why Commonwealth Bank appeared this week as a backer of a company called OwnHome, which offers a buy now, pay later model where the company buys the house, the first-home buyer puts down about 2 per cent of the house value and makes payments to the company equivalent to 2.5 per cent of equity each year. After a period of time ­(ranging up to seven years), the customer can buy the property.

It sounds like a smart idea, it’s backed by some very smart financiers, including Paul Bassat’s Square Peg.

We are going to see more of this innovation in the months ahead as the Bank of Mum and Dad wakes up to the new reality of much higher homes prices.