This plan will juice the market, but there’s a catch
It’s pretty interesting watching the details of the so-called ‘First Home Buyer Deposit Scheme’ roll out.
For my money this is one of the most interesting housing policy announcements in recent years – and one that has the most potential to provide long-run support to property prices.
Remember, we’re talking about a scheme where buyers who can muster a 5% deposit can lean on the government for another 5%, to enable them to get a vanilla mortgage on a property.
It’s restricted to the low-end of the market (cheaper properties), but not the low-end of buyers (the means tests ensure that it’s available to pretty much everyone).
It’s starts with an initial roll-out of 10,000 places in the scheme, but there’s nothing to say it can’t grow or just keep rolling on forever.
So the government is throwing fuel on the entry-level property market. The results will be predictable.
But there’s a catch. There’s always a catch.
The banks want to be paid to participate in the scheme. That’s the word from the AFR:
Big banks are seeking the flexibility to charge higher interest rates under the Morrison government’s scheme to help first home buyers because of the increased risk of lending to first-time borrowers with as little as 5 per cent deposit.
The big banks also query whether the government’s promised first home loan deposit scheme can be up and running by its scheduled January 1 start date.
Bankers are concerned that home buyers with deposits as little as 5 per cent of a property’s value will be riskier than other first-time borrowers who usually are required to have saved a minimum deposit of at least 10 per cent, and sometimes as high as 20 per cent.
…Housing Minister Michael Sukkar is trying to boost competition in the scheme against the big banks, by permitting only two of the big four – ANZ, Commonwealth Bank of Australia, National Australia Bank and Westpac – to participate.
The government hasn’t announced which two of the big-four banks will be allowed to play in the scheme, but its not clear that any of them want to.
Banks (and more importantly, the people who invest in banks) are very concerned about “capital quality” – that is, of all the assets on the banks’ balance sheets, how risky are they.
So an injection of young buyers who haven’t scraped together a 10% deposit, on balance, is probably going to pull the banks capital quality down. Pretty much by definition, someone who can’t pull together a 10% deposit is a riskier proposition than someone who can.
And it’s the first rule of banking that higher risk demands higher reward. And so the banks want to be able to charge these people more.
And to be honest, it’s fair enough.
But this sets up an awkward situation. Imagine finding out you won the lottery and got a spot in the government’s scheme, only to find out the banks now want to charge you 100 bips above the prevailing mortgage rates.
Two-steps forward, one step back.
There’s always a catch.