A trend is emerging in Australian property ownership which we have seen very little of before.
The Government is ‘partnering’ with Aussie first home buyers in what’s called a shared equity scheme.
And it’s about to put a rocket under demand for housing from first home buyers.
It all started with Prime Minister Anthony Albanese in the lead up to the federal election. The Labor Party’s ‘Help to Buy’ initiative will help first home owners get into the property market by investing up to 40 per cent of the purchase price of a new home, or 30 per cent of the purchase price for an existing home.
It will be available for any first home buyer who:
- Is an Australian citizen older than 18 years of age;
- Earns $90,000 or less per annum as an individual, or $120,000 as a couple (i.e. the current average Australian income);
- Lives in the purchased home; and
- Has saved a minimum 2 per cent deposit.
Effectively the Government ends up owning a 40 per cent share of the home, with any increase in value to be split with the Government based on the percentage of the purchase price they contributed.
Let’s run through an example.
Say you buy a first home for $500,000:
- the Government put in $200,000 (40 per cent)
- you come up with the rest in the way of
- $10,000 as a cash deposit (2 per cent) and
- $290,000 as a loan that you take out with the bank.
If you then sell the home some years later for $1 million, the proceeds get split as follows:
- $400,000 to the Government (being their original $200,000 plus 40 per cent of the $500,000 increase in value – another $200,000)
- $600,000 to you
- being your original $10,000;
- the $290,000 you borrowed; and
- $310,000 (60 per cent of the increase in value).
You walk away with $310,000 from a $10,000 investment.
As the saying goes, 60 per cent of one is better than 100 per cent of none.
The most significant benefit for first home buyers comes in the form of reduced mortgage repayments, particularly in an environment of rising interest rates. A first home buyer ends up with a debt of just $290,000 on a $500,000 property versus something in the order of $450,000 (if you put down a 10 per cent deposit) without the Help to Buy scheme.
For the homebuyer buying a home for $500,000, the mortgage repayments would be $850 per month cheaper*.
For a homebuyer in Sydney, where there is a maximum price cap of $950,000, the mortgage repayments would be $1,600 per month cheaper*.
*Source: NAB home loan repayment calculator. This scenario assumes a 25-basis-point increase on the current base variable mortgage rate of 3.45%, monthly principal and interest over 30 years.
It’s a fantastic opportunity, however the concept itself isn’t new, it’s just new to most parts of Australia which has been gradually introducing watered down versions in recent times.
The UK has been offering shared ownership schemes for many years.
The Western Australian government has been offering a shared home ownership incentive since 2008, albeit the current version only applies for the purchase of off-the-plan apartments.
The Victorian Government unveiled a similar initiative in 2021 that is available for people buying their first home in some regional parts of Victoria.
The South Australian government also has a shared equity program called Home Start.
The concept is gaining popularity and momentum at a rate of knots.
Just this week the New South Wales Government announced it would introduce a similar equity share scheme from January 2023 for up to 3,000 nurses, teachers and police workers per annum.
The new Federal Government Help to Buy scheme will be open to 10,000 Australians each financial year, starting January next year.
When you add up all the Federal and State equity share initiatives, plus the ones likely to follow, there could be up to 20,000 Australians per annum buying their first home with a 40 per cent contribution from the Government.
That’s huge. For perspective, about 500,000 homes sell each year in Australia, and roughly 30 per cent of all buyers are first home buyers.
That means one in 25 buyers could be buying with the assistance of a 40 per cent contribution from the Government by this time next year.
The value of property comes down to supply and demand.
These initiatives are going to create a whole lot more demand for property and, at the same time, provide one of the most effective affordability solutions Australia has ever seen.
