How the First Home Loan Deposit Scheme could shape the property market in 2020

• Low to middle income earners can borrow with just a 5% deposit on properties under a set threshold
• Limited to 10,000 loans every financial year
• The government will ‘sponsor’ up to 15% of the loan
• Exemption from Lenders Mortgage Insurance
• This will be a significant demand driver, especially for regional property
• Investors can expect the increased demand to push up prices

Earlier this year, in an effort to improve first home buyers’ access to the property market, the government announced a new initiative. The First Home Loan Deposit Scheme (FHLDS) is a government guarantee designed to help low and mid-income earners secure finance for their first home.

Under the scheme, eligible buyers will be able to take out a loan with a deposit as small as 5% of the value of the property. The government will ‘sponsor’ up to 15% of the loan. Borrowers would also not be required to pay Lenders Mortgage Insurance (LMI), a fee designed to reduce a lender’s risk exposure when the loan-to-value (LVR) ratio exceeds 80%.

Although not available to investors, the policy may have a flow on effect for the rest of the market, potentially accelerating property prices. With the initiative set to roll out January 1, 2020, it is another reminder why now could be a great time to invest in property.

Stimulating demand in the market

The FHLDS will be limited to 10,000 eligible borrowers per financial year. With 110,000 first home buyers in 2018, the limited number of loans supported by the scheme should stimulate near-term demand for property. This demand won’t necessarily be newly ‘created’, rather, demand brought forward.

Lower deposit thresholds will make finance more accessible to certain borrowers. The removal of LMI will help them save thousands of dollars. As the program is set to run on a first-in first-served basis, it is likely to lead to an initial surge of applications once the scheme begins.

It is also possible that we may see a particular effect in 2020 with the scheme commencing mid-financial year. There may be two periods of heightened buying activity that spark the broader market. First, the weeks following the launch of the program in January, and then, at the start of FY21.

The residential construction downturn still has some time to play out until supply catches up with demand. With demand brought forward, it could underpin higher house prices on account of increased competition at auctions.

A similar phenomenon occurred when the Rudd government doubled the first home buyer grant during the GFC (Figure 1). In fact, first home buyers have largely driven recent property price growth. They currently make up 29.8% of the national market for owner-occupier home loans, compared with a decade average of 25%.

Again, it all comes down to location

The scheme is rolling out across the nation, however, there will be different property price thresholds based on location. This is the upper valuation limit for a property that may be eligible for the First Home Loan Deposit Scheme.

Price thresholds, detailed here, are greatest on the eastern seaboard. Sydney and the regional centres of Newcastle, Lake Macquarie and Illawarra will lead the way with a property price cap of $700,000, while Melbourne and Geelong will follow with $600,000.

Median house prices for Sydney and Melbourne are well above the thresholds at $920,000 and $751,000 respectively. Although median apartment prices are more closely aligned with the cap, in some cities they remain out of favour among investors amid oversupply and quality concerns.

In blue-chip suburbs, the FHLDS is unlikely to play any role driving price activity. However, in outer growth corridors or fringe suburbs of the capital cities, it is likely first home buyers will compete against investors. Affordable properties valued just below the price thresholds may be the biggest beneficiaries of this scheme and could offer investors an opportunity.

By the same token, the policy has the potential to shift additional demand to regional centres, where there is superior affordability for first home buyers, or other capital cities like Brisbane and Adelaide, where the property price cap sits closer to the median home value in these regions.

Beyond the initial rush

With interest rates poised to drop even further, and property prices having already started to rebound, investor finance should pick up in 2020. The First Home Loan Deposit Scheme will encourage more demand to enter the market sooner, which is what investors look for when assessing the prospect of future capital gains. That’s why getting into the market now could be a great opportunity.

After an initial surge of first home buying activity, an overall increase in demand could eventually work against first home buyers and push them back to the outer. However, the government can easily adjust the scheme’s property price thresholds to support future demand. Regardless, by then positive market sentiment should be an overriding factor, with the prospect of stronger investor financing underpinning future price growth.