Who has the better first home buyer policy?

With less than a week until the Federal Election, Ray White chief economist Nerida Conisbee examines the pros and cons of both parties housing policies.

With less than a week until the election, the Liberal Party has introduced two more policies relating to housing.

The first policy was an extension of the downsizer scheme introduced in 2017-18.

The second policy announced allows first home buyers to invest up to 40 per cent of their superannuation, up to a maximum of $50,000 to help with the purchase of their first home.

The scheme will apply to both new and existing homes with the invested amount to be returned to their superannuation fund when the house is sold, including a share of any capital gain.

The money taken out of the super fund to buy the house will be put back into people’s superannuation funds should the house be sold, including a share of any capital gain.

The Coalition says this will protect people’s long-term savings ahead of their retirement.

The Labor party’s plan

The first home buyer scheme proposed by the Labor Party is a “shared-equity” scheme where the Federal Government would essentially buy 30 or 40 per cent of a property with the buyer.

That portion of the property would then be owned by the government, and could be bought by the homeowner over time.

When the home is sold, the proportion of equity would need to be paid back.

How do the two schemes compare?

1. Both schemes would lead to prices rising faster than they otherwise would

Giving first home buyers more money than they otherwise would have means that prices will rise.

A similar scheme in the UK to Labor’s “shared equity” proposal led to a 6 per cent increase in prices in that country. It is likely that similar increases would be seen from either the Labor or Liberal proposals.

2. Using superannuation for buying owner-occupier housing is not recommended

The family home is not an asset that can be easily cashed in at retirement.

Often the equity in the home is used to move into more appropriate accommodation such as retirement homes or aged care facilities.

Using superannuation from early on in a person’s life cycle for a home can also lead to far less at retirement, particularly if the family home can’t be easily sold to downsize or does not increase in value as hoped.

3. First home owners usually use the equity in their first home to buy their next home

First homes are rarely forever homes and most first home buyers use the equity built up in their first homes to get a home more suitable for the next stage of their lives.

Having to hand back a big chunk of equity to the government at this stage, or back into superannuation, will make it difficult for first home buyers to get into their next homes

4. Using superannuation is more straightforward than shared equity

The main criticism of the shared equity model in the UK is that it has hindered by red tape through the life of the ownership of the property.

For example, valuations of the property need to be done when people’s incomes increase, conveyancers have had to get involved. Using superannuation is more straightforward in that is people’s own money, rather than taxpayers

5. People have short memories

Although not an issue now, it is likely that many first home buyers will not be completely happy about handing back a sizable chunk of their capital gain to the government once they sell, or alternatively forced to put it back into superannuation.

This will be even more so the longer that they own the property and the capital gain increases.

The best scheme for first home buyers is currently the First Home Loan Deposit Scheme where eligible buyers do not have to pay mortgage insurance to buy with a lower deposit.

This scheme assists with the deposit but is cleaner in that, provided the first home buyer is able to pay off the loan, does not require ongoing government involvement through the life of the first home buyer’s ownership of the property.

Beyond that, housing supply is critical – long term, if there are enough homes for everyone, then rental rates and house prices are less likely to increase at rates which cause housing distress to buyers and renters.

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Nerida Conisbee

Nerida Conisbee is the Chief Economist at Ray White.