Economists puzzled by lift in home scheme caps amid fears of negative equity trap

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Price caps fort he First Home Guarantee were raised around the country. Picture: David Swift

Economists are asking why the federal government decided to raise the price caps used within the First Home Guarantee scheme ahead of expected price falls in the latter half of next year.

Both major parties have backed the Morrison government’s decision to allow borrowers accessing the scheme to buy more expensive homes in the lead up to the election following massive price spikes through the pandemic.

From next financial year, first home buyers with deposits of as little as 2 or 5 per cent will be able to purchase homes valued up to $900,000 in Sydney and $800,000 in Melbourne without the need for lenders’ mortgage insurance under the federal government’s two-year-old scheme, with the caps different in each capital and region.

The number of borrowers that can partake in the scheme was raised to 50,000 in the latest federal budget. It is the second time caps have been lifted since the scheme was introduced in 2020.

PropTrack director of economic research Cameron Kusher said the decision would put borrowers accessing the scheme at higher risk of falling into negative equity.

“Going forward, there may be less of a need for those high caps,” Mr Kusher said. “The expectation is that interest rates will go up and property prices will fall and there is a possibility going forward the price paid in recent times may go into negative equity.

“Our default levels are still very low but that can change. I guess a lot of people aren’t that financially astute and (raising the caps) might entice them to spend closer to their maximum borrowing capacity.”

Opposition Treasury spokesman Jim Chalmers said on Monday that Labor had long campaigned for the price caps to be raised.

He added that he did not think the demand-side focused scheme distorted the market and was only part of the way to addressing the affordability problem around the country.

The scheme was labelled “crazy” by independent economist Saul Eslake, who said it failed to impact the problem – home ownership rates.

“We have almost 60 years of history which shows – I think, unambiguously and unequivocally – that anything allowing people to spend more on the purchase of housing than they otherwise would results in more expensive housing, not in more people owning housing,” he said.

“People with only 2 per cent or 5 per cent deposits are much more vulnerable in those circumstances than those with deposits of 20 per cent or more. You might have thought a moment’s reflection on the origins of the Global Financial Crisis in the US in the early years of this century would have given the designers and proponents of these schemes cause to reconsider, but apparently not.”

Mr Kusher did note that many of the caps are still below the median in each respective capital city, meaning more than half the market is inaccessible to those accessing the scheme.

Property Council chief executive Ken Morrison said the decision would help many more individuals and families bridge the deposit gap and purchase their first home.

“Given the extent of house price increases in recent years, it makes sense to lift the scheme’s house price caps and we welcome this decision,” he said.

“According to our recent research 70 per cent of voters fear the great Australian dream of home ownership is now out of reach, and almost 90 per cent of people trying to get into the market say housing affordability is one of the most important issues that will decide their vote in the upcoming election.”