The Federal Government is rolling out a new first home buyer scheme. In this article, we dive into the initial information released and look at how the initiative may positively and negatively impact buyers. 

There's no denying the Aussie housing market is difficult to get into for first home buyers. Especially for buyers who are in their mid-twenties or early thirties, who have spent a few years on minimum wage learning a trade, or went to uni and now have a significant student loan to pay off.

In the 1970s, average home prices were around two times disposable income, meaning the great Australian dream was largely affordable for many.

Jump forward four or so decades, and things have certainly changed. In fact, research now shows house prices have risen so quickly compared to income, that buying an average-priced property will set you back more than five times average disposable income.

And that's not taking into consideration this 'average property price' isn't really indicative of what most will pay for a place in one of Australia's major cities, like Sydney.

The first home buyer challenge is an issue of which the Government is well aware. In fact, it was at the centre of one of the last minute, highly-promoted promises by both major parties during the most recent federal election.

As we all know, the Liberal/National Coalition Government came out on top in that battle, and while that means (happily for investors) there have been no changes to negative gearing or capital gains, new initiatives for first home owners will be rolled out as of 2020.

What is the new first home buyer initiative?

Rather than offer rebates or early access to super, as per some state and federal first home buyer initiatives, this new scheme sees the Government taking the 'mum and dad' role and playing 'guarantor' for bank loans, enabling buyers to purchase with a lower deposit and no lenders mortgage insurance.

Essentially, the Federal Government initiative, which will commence in January 2020, will enable first home buyers on low and middle incomes, to purchase a property with a deposit of just 5%.

Of course, the scheme is not boundless, and comes with an array of specifications that must be met.

Firstly, the number of buyers able to access the initiative is limited to 10,000. Based on all media reports to-date, the selection of those 10,000 purchasers will largely be 'first come, first served'. That is, those who apply and are approved first, will be offered the Government loan guarantee.

Notably, according to the ABC, the Finance Minister confirmed there will be no even breakdown or set number of successful applicants per state or location. The guarantees will be offered based on your place in line, regardless of location and how many other buyers have been successful in your area.

The opportunity will also only apply to certain properties. For example, buyers can apply if their Sydney property is worth $700,000 or less, those outside of Sydney, in wider NSW, will have access with a property worth $450,000 or less.

In Melbourne, the top property price for access is $600,000, and $375,000 across broader Victoria.

It isn't only the two major cities where caps will apply however, with buyers in regional hubs that are home to significant populations (over 250,000) also required to purchase properties under specified prices to qualify for the scheme.

To meet the requirements of the scheme, as a single, you will need to earn up to $125,000 per year, and couples can earn up to $200,000 per year.

Of course, if you are a successful applicant, you will need to be prepared to move in, as purchases must be for owner-occupied properties.

What does the initiative mean for buyers?

Depending on which media outlet your read, which economist you follow, or whether you get the opinion of Joe at the local pub, this initiative has both potential positives and negatives.

  • On the bright side, 10,000 people who may not have previously been able to purchase their first property will now have a better chance, most notably because the loan guarantee will mean they don't have to fork out extra for lenders mortgage insurance which can set you back more than $10,000.
  • Not so bright, by only providing access for 10,000 buyers, out of a reported 100,000+ who may be eligible for the scheme and who already have that 5%, may not really have much of an impact on the wider problem of housing affordability.
  • In contrast, there is still a large portion of potential first home buyers who just can't get that 5% together. If you consider Sydney's median house prices are up above the $1 million mark, if a first home buyer gets lucky and finds a property they want at $700,000, they still need to come up with $35,000 minimum -- when paying rent, inflated food prices, expensive transport, health insurance and so on, savings like those can be elusive.
  • In major cities which draw job seekers, house prices remain high. To meet the price caps for the incentives, buyers will need to sacrifice lifestyle and add on potentially hours of travel so they can purchase in outer suburbs that are more affordable. The initiative only supports owner-occupiers, so there is no option to rentvest.
  • An incentive like this still doesn't fix the disparity between salary increases over time, living costs and the sale price of homes. For many first home buyers, getting a loan of $700,000 is either daunting or not possible. In order for this issue to be rectified though, someone has to lose -- prices have to go down, which negatively impacts a range of other people. 
  • On another positive note, the Government is not only restricting the initiative to those buyers who shop at the big banks. The initiative will reportedly be provided through two of the major players, with half of the guarantees reserved for those using smaller lenders -- something to keep in mind!
  • Whether you view it as a negative or a positive, it is another $500 million bill being footed by the tax payer.

If you are considering purchasing a property for the first time, this could present you with an opportunity to do it faster than you had hoped. Be ready -- with 90,000+ others also vying for these first-in, best-dressed guarantees, the race is on!