Coalition’s home loan guarantee scheme a market distorting mechanism designed to win votes

Prime Minister Scott Morrison at a residential building site in Caddens to speak with young families about the Coalition’s First Home Loan Deposit Scheme. Picture: Gary Ramage

The Coalition’s home loan guarantee scheme is a classic case of the superficial winning out over prudent policy development. Good politics trumping good economics. Just watch as the individuals who have signed up to this scheme begin to suffer with rising interest rates and falling property prices in the years ahead.

The bottom line is that it is a market distorting mechanism designed to win votes, nothing more. The political equivalent of a popularity contest driving policy development. With property prices on the rise nationally in recent years, the Coalition decided to guarantee home loans for new entrants into the housing market who weren’t able to secure large enough deposits without government help.

In some cases participants only need a two per cent deposit to buy a home under the scheme. Putting to one side the fact that the scheme logically flies in the face of the banking royal commission recommendations to lift lending standards, in the inflationary climate we’re now in it is doubly bad policy.

The Coalition likes to crow about 60,000 Australians having signed up to the scheme, and it hopes that number will rise with today’s announcement that it is increasing the size of loans those using the scheme can access. For example, the cap in Canberra was $500,000 but it is rising to $750,000. In Sydney and major regional centres it rises from $800,000 to $900,000, taking effect on 1 July this year.

So right when economists are in universal agreement that interest rates are on the rise, the government lifts borrowing caps for people who ordinarily wouldn’t be able to save sufficiently to secure the deposit the banks say they need. People for whom paying a monthly mortgage is a new thing.

Prime Minister Scott Morrison meets prospective new home buyers Danielle and Christopher Stephens and their children Zayne (2 weeks old), Gabriella (2yrs) and Kelsey (6yrs) during a visit to the home of new homeowners Lachlan Kowaleski and Katie Macqueen in Jamisontown.

It is crazy. And at a time when mortgage payments will sharply rise in the coming years, and houses are likely to lose value.

Few experts on the housing sector believe prices are going to do anything other than fall as rates rise, which courtesy of this scheme could mean we have thousands of new home owners living with negative equity in the years ahead. That is, the value of their home dips below the minimal equality they have in the property, because of such low deposit requirements by the government.

And for the rest of us not eligible for this scheme, guess what? We are on the hook for any defaults within it, because the government (that is, taxpayers) are guaranteeing the loans. So if individuals default and there are outstanding costs, we all cover those out of pocket expenses.

Inflation figures from overseas are deeply worrying, especially out of the United States. Our own inflationary pressures are also high. Interest rates are tipped to rise four times this year alone, and keep on rising next year. Because rates have been so low for so long, such a lift in rates could see some mortgage payments lift by 50 per cent or even more. It will shock many, especially those new to paying a regular mortgage and who wouldn’t ordinarily financially qualify were it not for this scheme.

For some people that will push their mortgage payments into default territory. If you can’t pay you need to arrange bridging finance, or sell potentially at a loss. That’s ok if you have equity in your home, but participants in this scheme simply will not. And a reminder: taxpayers will pick up the tab and these people’s lives get crushed.

Prime Minister Scott Morrison shakes hands with a passer-by in Jamisontown to meet first home buyers. Picture: NCA NewsWire / Christian Gilles

The risk in the current economic climate isn’t worth the reward.

Sadly Labor has supported the Coalition on this scheme, which speaks to the political value of it rather than its economic worth. They don’t want to be painted as the enemy of first home buyers. The superficial wins out again.

We often lament horse-race journalism and a lack of policy rigour in the way elections get covered. This is a classic example of poor policy that needs to be rigorously picked apart by the media and experts alike.

At every level it is wrong: it leverages new home buyers beyond their means if interest rates go up; it puts them at risk of negative equity if house prices fall; it defies the recommendations of the banking royal commission and it leaves the rest of us covering losses by those who access the scheme because of the taxpayer guarantees within it.

Peter van Onselen is a professor of politics and public policy at the University of Western Australia and Griffith University.