New Help to Buy Scheme risks fuelling an overheated property market

Government schemes designed to help first-time buyers have backfired spectacularly, as the programs inflate prices in the very market segment they aim to assist.

Home prices for first-time buyers are rising faster than the rest of the market as the government launches the Help to Buy shared equity scheme. Pictures: Brenton Edwards/NewsWire, iStock

Talk about adding fuel to the fire.

As home prices for first-time buyers move faster than the rest of the market, the government has launched yet another assistance scheme into an overheated sector with the launch of the so-called Help to Buy Scheme.

The scheme, where home purchasers can share ownership with the government, comes hard on the heels of the expanded first-home deposit scheme, which allows any first-time buyers to purchase a home with a 95 per cent mortgage.

Home loan grants will always lift home prices, but the universal 5 per cent Deposit Scheme is unprecedented. Anyone still sceptical that the scheme is raising prices inside the very sector it is supposed to help might note that the prudential regulator has had to intervene and impose new lending limits for the banks.

Compared to the 5 per cent Deposit Scheme, the Help to Buy Scheme is less risky. For a start, it is not universal. Places are capped at 10,000 a year. It also has lower price caps than the deposit scheme.

But then again, whether homebuyers want to share home ownership with the federal government – and the bureaucratic challenges that may reveal – is another question altogether.

Nonetheless, the scheme – where the government will take an equity stake of up to 40 per cent in a home – at least means there won’t be another batch of hopefuls handed mortgages reminiscent of the subprime crisis that triggered the global financial crisis.

Unfortunately, the Help to Buy Scheme now ranks very much in second place because the government decided to change its own plans and release the expanded home deposit scheme three months ahead of schedule back in October.

In short, they did it the wrong way around.

The latest report from property research agency Cotality refers directly to the home deposit scheme as “defying the affordability strain” while also noting lower value suburbs are delivering the strongest gains.

Home prices are rising across the board, prompting more investor activity. Picture: Brenton Edwards/NewsWire

Overall, home prices have been rising across the board by one per cent a month, prompting investors to return to the market in droves. Residential investment lending jumped 18 per cent in the three months to December.

Inside the market, buyers’ advocates are reporting that the blitz of housing grants is directly affecting the bidding at auctions up until the 5 per cent Deposit Scheme threshold is reached. (The thresholds are different in every state, ranging from $450,000 up to the maximum of $1.5m.)

Meanwhile, the banks can’t believe their luck.

The regulators are now telling them to cool things in the housing market. The Australian Prudential Regulation Authority’s new guideline is that they must not have more than 20 per cent of new lending going to borrowers at more than six-times income.

But why worry? Government-sponsored buyers are beating down the doors. The Commonwealth Bank is reportedly putting staff on weekend shifts to cope with the surging demand for the 5 per cent Deposit Scheme.

Property investors hover in the space and cherry-pick the best opportunities in the market that were looking strong anyway, with forecasts for price rises close to 10 per cent-plus for the next 12 months.

Property market analysts also suggest that investors are closely watching the segment of the market just above the 5 per cent deposit thresholds, with some working on the theory that this layer is offering keen value since the first-home buyers drop out once the threshold is reached at an auction.

On top of that, investors will be well aware that there is an acute lack of stock – the mystery as to why stock levels at auction are 18 per cent below average levels has been explained by sellers having nowhere to move, and choosing instead to remain in place.

Keep in mind, the grants blitz has been unleashed on a market where the supply of homes is not keeping up with demand in the first place.

For investors, this is all highly attractive – enhanced demand, a rental shortage, and strong forecasts.

For homebuyers, it’s paved the way for the entry-level segment to become the hottest part of the market.

For the government, it is time to admit the whole thing has backfired.