How government can really help home buyers

Despite record low interest rates, first home buyers now account for less than 10 percent of all new home loan dollars financed – a record low.

Yet an opportunity to support a savings initiative for first home buyers is going to waste, according to RateCity.

The initiative, a Government program aimed at supporting saving by would-be buyers, is not working well, and needs urgent attention – the First Home Saver Account scheme.

When the scheme was launched in 2008, it was predicted to help hundreds of thousands of Australians. But latest Australian Prudential Regulation Authority figures show a total of $491 million is held in just over 45,000 First Home Saver Accounts (FHSA) as at June this year.

Alex Parsons, CEO of RateCity.com.au, said there are a number of things Government could do to improve the scheme – most notably around reducing the paperwork burden. With some minor adjustments, there’s an opportunity for more institutions to come to the party.

“Right now, only nine institutions offer these accounts – and despite some offering them in the past, none of the big four banks currently do, so it’s little surprise that many potential buyers haven’t heard of them, and don’t use them,” he said.

“It’s a way for banks to support real saving initiatives for first home buyers – and any scheme that helps would-be buyers to build a larger deposit should be encouraged.

“Entering the property market with a bigger deposit is a good thing because it means new home owners are less susceptible to movements in interest rates, and in a much better position to withstand shocks in their own income.”

A FHSA can only be used to buy or build a first home and they have two main benefits. First, any interest earned on the account is taxed at 15 percent, and second, to encourage savers to make regular deposits, the government will add a bonus that’s equal to 17 percent of any deposits made (up to a maximum contribution by the saver of $6000 annually).

RateCity data shows the average base interest rate paid on FHSA is 2.54 percent.

There are a number of conditions that must be met, including a minimum deposit of at least $1000 each year over at least four financial years before you can withdraw the money, and the account balance is capped at $90,000.

“The fact that the major banks have stopped offering the products suggests that they are not attractive enough to the mainstream market to be viable in their current form,” said Parsons.

“A relaxation of some of the conditions, aided by some smart and effective marketing by the government may breathe life back into what is essentially a great idea to encourage responsible borrowing.”

With first home buyer numbers and dollars financed at record lows, some have called on Government to boost the amount of cash support being given to first home buyers, by either increasing grants or limiting stamp duty concessions.

But Parsons added, “Unfortunately, the ‘bring back the grant’ argument is the easiest, quickest and most familiar reaction first home buyers have to help them get a home. What most people don’t understand is that it just fuels higher house prices and doesn’t fix the underlying problem.

“Rather than kicking the can along the road with more grants, we should instead be focusing on schemes that encourage and support real savings by first home buyers in Australia. This needs to be combined with a thorough review of some of the key drivers of affordability issues such as negative gearing, stamp duty and land supply constraints.”

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