First home buyers in Australia are experiencing a surge in mortgage applications, driven by the federal government’s 5 per cent deposit scheme. However, this initiative may ultimately hinder the very individuals it aims to assist, according to insights from the broker group Loan Market. The latest data reveals a remarkable 49 per cent increase in mortgage applications from first home buyers in October 2023, the month the scheme launched. Although applications dipped in November, they rebounded in December, exceeding pre-incentive levels by 17 per cent.
The government program, designed to help buyers with lower deposits by guaranteeing the remaining 15 per cent, has inadvertently inflated housing prices in the first-time buyer category. This inflation could diminish borrowing power for new buyers, particularly as interest rates rise. Sam White, executive chairman of Loan Market, pointed out that well-intentioned policies can often backfire. “You can have government policies which are generally done with good intentions but generally come back to harm the people they most intend to help,” he stated in an interview with The Australian Financial Review.
The impact of the scheme has already been felt, with housing values in affected areas rising by 1.2 per cent in October, outpacing the wider market’s gain of 1 per cent. This increase highlights how the policy has stimulated demand without addressing supply constraints, leading to higher property prices for first home buyers. Many of these buyers, who are only able to manage a 5 per cent deposit rather than the typical 20 per cent, are now facing a more challenging market.
Despite the influx of first home buyer applications, total mortgage lodgements in the December quarter rose by 31 per cent compared to the same quarter the previous year, largely due to competition from investor buyers. Jon Mott, an analyst at Barrenjoey Bank, noted that investor activity may have peaked, with many investors attempting to capitalize on the surge in first home buyer demand.
The Reserve Bank of Australia reported that the seasonally adjusted value of total owner-occupier housing credit increased by 6.1 per cent to $1.7 trillion over the twelve months ending in December 2023. Concurrently, total investor credit rose by 7.5 per cent to $817.8 billion.
According to White, the primary flaw in incentive schemes like the deposit program is their tendency to inflate property prices. “What that did was stimulate demand without doing much on supply,” he said. As interest rates rise, the borrowing capacity of first home buyers will be further constrained. “For every quarter point rise, your serviceability rate drops by 4 per cent, as a rough rule of thumb,” White explained. He provided an example: a prospective borrower may find their capacity to borrow $1 million reduced to $960,000 following interest rate increases.
This paradox highlights the irony of the government’s initiative, which is intended to facilitate market entry for first-time buyers but may complicate their financial circumstances as borrowing conditions tighten. “In a funny sort of way, you are going to need to have a higher deposit to get the house you wanted this week if rates go up this week,” White added.
Looking ahead, Mott suggests that while housing demand remains robust, the potential for rising interest rates may temper this growth. He stated, “Despite the likelihood of higher interest rates, the outlook for housing credit appears robust,” citing factors such as rising real wages, strong population growth, and positive employment prospects as underpinning continued demand for housing.
As policymakers evaluate the effectiveness of current initiatives, the balance between stimulating demand and ensuring affordable housing remains a pressing challenge in Australia’s evolving real estate landscape.
