If you’re in the market for your first home – especially if you’re looking at a newly established property – you’re likely to be checking whether you’re eligible for a First Home Owners Grant.
Depending on what state you live in this may include a cash grant and/or an exemption from or concession on the stamp duty.
Of course the challenge for first home buyers is finding the balance between saving a sufficient deposit and breaking into a market with rising prices.
But with housing increasingly unaffordable and with the ABS now estimating only 13.2% of all loans taken up are for first home buyers, are first home owners grants really benefiting prospective first home owners? Or are they just pushing up the prices for everyone?
Cash Grants May Inflate The Market
In any market, prices will be determined – at least at the most fundamental level – by supply and demand. Consistent with this, there is a line of thought that first home owners grants artificially inflate the market.
Writing in The Australian (First home grants keep young off property ladder, 21 January 2014), Property Reporter Greg Brown goes as far as saying that “First home owner grants are one of the biggest failures in government policy in the past 50 years, with extra cash encouraging owners to bump up the selling price, making it harder for the young and those on lower incomes to get a foot on the housing ladder.”
Brown quotes leading economist Saul Eslake, who believes that “Cash grants and other forms of assistance to first-time home buyers have served simply to exacerbate the already substantial imbalance between the underlying demand for housing and the supply of it”.
Assuming we accept this as a negative consequence of a well intentioned policy, do the pros outweigh the cons?
Bridging The Deposit Gap
It’s important to remember that lenders will always consider two things when assessing a loan application:
- How much can you afford to borrow
- How much security do they have over the loan
So once you’ve taken former Treasurer Joe Hockey’s ever-so-simple advice (thanks for the tip, mate) to “get a good job that pays good money”, you’ll then need to get together at least 5 to 10% deposit, plus any costs. No easy task.
In fact, I remember someone from my parent’s generation telling me that when they were saving their deposit, house prices were rising faster than they could save the required deposit – they were in effect going backwards. It was only because someone generous helped by loaning them part of the deposit, that they were able to buy. Of course not everyone is lucky enough to have such support.
So even if prices are slightly higher, cash grants can provide the little extra help required to get a first home buyer over the line. And this may allow you to get into the market before prices rise further, providing a saving at least offsetting the extra you may be paying for the property.
The Back-end Costs Are Just As Important
The other side of the coin is the back-end costs of purchasing property – in particular the exorbitant cost of state government levied stamp duty.
First home buyers do not have the luxury, available to existing property owners, of being able to leverage equity from other property to pay for this. Unless you can convince someone to act as a security guarantor, you’ll need to come up with these additional costs in cash – a significant barrier.
In conclusion, first home buyers are both winners and losers of first home owner grants. Of course, whenever they are available, it’s essential to know what you’re eligible for and to take full advantage of it. In fact, first home buyer, Michael, was able to buy his brand new first home with a low deposit of only $7,800!
Remember, it’s always good to speak with a good mortgage broker about what options are available to you.