For most people, buying their first home is daunting. But if Australians want to ensure home ownership isn’t out of reach for low- and middle-income earners and get better value out of taxpayer-funded housing support, it’s time to do more than simply hand out costly first home owner grants.
Evidence from overseas and interstate shows that a good place to start would be with making more options available to those on reasonable income but stuck renting.
Yet New South Wales – Australia’s most populous state, with the most expensive capital city - has done less than many other states and territories to develop cost-effective options for aspiring home owners.
As NSW heads to an election at the end of this month, its next state government has a chance to catch up and make it easier to get a foothold in its notoriously costly housing market.
Rethinking how we own our homes
Australians tend to think of three different ways of being in the housing market: private ownership of a home, renting from a private landlord, or renting public housing from the government.
But there are other models of stable housing, variously called “intermediate housing tenure”, “shared equity”, and “shared equity homeownership”. Basically, the resident owns their home through partnership with either the government or one of Australia’s hundreds of registered community housing providers.
Depending on the arrangement, the resident can either gradually buy out the housing partner (the government or community housing provider), or else they can cash in their portion to move into market-rate ownership.
Interstate examples of shared ownership schemes
Western Australia’s government-run scheme was applauded in a recent report and won its department a 2014 Premier’s Awards for Excellence in Public Sector Management. Under that scheme, the householder buys with up to 30% of the value held by the government, and borrows the remaining 70% through the government-run KeyStart loan scheme. The buyer needs only a 2% or $2,000 deposit and there are no account keeping fees.
Like the WA scheme, the Northern Territory’s HomeNorth scheme enabled residents to buy with the government holding up to 30 per cent of the value. South Australia’s Shared Value Affordable Homes program allows low- to moderate-income buyers to buy their home with the government providing a 20% discount. When they sell, the equity gain is shared with the government according to an agreed formula.
The Australian Capital Territory’s Land Rent scheme allows low- to moderate-income buyers to pay rent for their land based on its unimproved value, and take out a mortgage for the home’s construction cost.
Yet apart from the ACT, there is a notable absence of schemes on Australia’s heavily populated east coast.
In NSW alone, there are already nearly 400 not-for-profit community housing providers providing affordable rental homes. Many of these are interested in offering ownership options to their tenants, as well as to people stuck in private rentals who could afford a moderate loan. However, under current First Home Owners Grant legislation, such buyers would be ineligible for funding.
Costly grants versus stable solutions
When we talk about first home buyer assistance, we assume that government grants are the best option. Yet that’s not what the evidence shows.
As prominent economist Saul Eslake highlighted last year, government grant schemes for first home home buyers have cost taxpayers more than A$22.5 billion since 1964, with poor results:
It’s hard to think of any government policy that has been pursued for so long, in the face of such incontrovertible evidence that it doesn’t work, than the policy of giving cash to first home buyers… 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.
If we’re looking for more bang for our housing buck, shared equity homeownership schemes could be a better solution.
One study in the US found that one scheme used just one-fifth of the tax dollars that would have been spent if the buyers had been given a one-off grant (similar to Australia’s First Home Owner Grant).
Studies to date show that US shared ownership schemes can also have a social upside, with much lower foreclosure rates than in the broader market in what has been a turbulent time for many US home owners since the global financial crisis.
How to help more people buy their first home
If the next NSW government really wants to help more people in the state own a home for the first time, there are two options they could consider.
Assuming scrapping the First Home Owner Grant is too politically difficult, the government could instead amend the legislation to make the grants available for people buying into shared ownership schemes with community housing providers.
If the government wanted to be more ambitious, it could make some of the grant budget available as competitive funding for not-for-profit community housing providers to develop shared ownership housing.
When designed well, shared ownership can provide viable, stable housing options for low- to moderate-income earners – many of whom might never get to become first home buyers without a helping hand at the start.