First home buyers' deposit guarantee a risk

Who would have thought that within weeks of Scott Morrison announcing the election Labor and the Coalition would be committed to a high-cost, potentially high-risk, first home buyer's strategy that may inadvertently mandate what the Hayne Royal Commission has slammed as irresponsible lending?

The scheme, costed at $500 million, is modelled on a New Zealand program which allows first home buyers to borrow on a 10 per cent deposit; not the usual 20 per cent.

Prime Minister Scott Morrison at the Liberal Party campaign launch in Melbourne on Sunday. Picture: Luis Ascui

Prime Minister Scott Morrison at the Liberal Party campaign launch in Melbourne on Sunday. Picture: Luis Ascui

While the Morrison government, which has apparently done little or no financial modelling, is quick to point to the New Zealand program as proof it will work, the comparison is nonsense.

This is because it has chosen to set its minimum deposit at 5 per cent.

An approved Australian borrower would be making repayments on a principal 15 per cent greater than under existing lending guidelines and 5 per cent more than the equivalent New Zealand first home buyer.

Neither the government nor Labor, which quickly pledged to match the policy to eliminate a point of difference ahead of Saturday's election, have acknowledged New Zealand and Australia are very different property markets.

New Zealand only has one city, Auckland, with more than 1 million people. Wellington and Christchurch are both just above 400,000. Hamilton, the next largest, has less than 250,000.

New Zealand also recently introduced tough foreign investment controls to make it difficult for non-resident foreign nationals to buy property.

While the Morrison government is quick to point to the New Zealand program as proof its own scheme will work, the comparison is nonsense.

New Zealand's "Welcome Loan" is a specific financial product. Its concessions cannot be applied to general home loans. It is means-tested. The loans operate in conjunction with a "KiwiSaver" savings scheme and first home buyer's grants.

The other big difference between the two schemes, as they currently stand, is Australia's will be limited to just 10,000 first home buyers, or about 10 per cent of all those currently believed to be in the market.

While this may go some way to minimising the upward pressure on prices financial pundits have been quick to warn against, it is unlikely to win hearts and minds among the 90,000 aspirants who miss out.

It has also put Labor in the interesting position of having two housing policies which, on the face of it, appear to be pulling in opposite directions.

Labor's proposed negative gearing reforms, which would come into effect on January 1, 2020, the same date the proposed home deposit scheme would kick in, have been criticised by housing industry pundits as likely to further depress house prices.

Labor has defended the reforms, saying lower house prices would make it easier for first home buyers to crack the market.

It has now embraced a policy which many of the same pundits say has the potential to increase house prices and which the Morrison government could rightly claim will help put a floor under the value of existing homes.

This is the least of it, however. The most bizarre aspect of the Home Loan Deposit Scheme is that young Australians are to be encouraged to take out massive loans on minimal deposits at the same time class actions are underway across the country to compensate the victims of irresponsible lending by the banks.

If the housing market continues to fall, those buyers may find themselves financially ruined for life as the value of their investment falls below the size of their loan.