FHLDS fails to assist FHBs who can’t buy property: NHFIC

A statutory review of the operation of the National Housing Finance and Investment Corporation (NHFIC) Act 2018 has found that the First Home Loan Deposit Scheme (FHLDS) has mainly benefited first home buyers (FHB) who would have been able to purchase a property either with the support of lenders’ mortgage insurance (LMI) or with a full 20 per cent deposit in one or two years.

This conclusion is consistent with the widespread view heard by the review that the impact of the FHLDS has largely been to bring forward demand that would have otherwise occurred regardless in the short- to medium-term, the report stated.

However, the FHLDS – which has seen more than 19,000 property settlements between January 2020 and June 2021 – has not appeared to have supported a large number of people who would otherwise have not been able to purchase a home.

“The majority of first home buyers do not obtain a benefit from the FHLDS. This is either because they are not eligible or because all available guarantee allocations have been exhausted,” the report said.

“For these prospective buyers, the FHLDS provides no benefit and there remains a pressing need for assistance in overcoming the challenge of reaching a 20 per cent deposit.”

The government-backed scheme aims to support eligible home buyers (those earning under $125,000 as a single or $200,000 as a couple) in purchasing their first home sooner by reducing the amount of deposit required to access a home loan without having to pay LMI.

Instead, the NHFIC – which administers the scheme – guarantees the scheme lenders up to 15 per cent of the value of the property financed by an eligible FHB’s home loan.

FHBs who do not benefit from the FHLDS have to compete for the same stock of suitable first homes with FHLDS-supported buyers who perhaps have more funds at their disposal with which to bid for (and bid up the price of) properties, the report said.

High demand for the FHLDS

NHFIC research has shown that the FHLDS supported one in eight FHBs who purchased a home in Australia between March and June 2020.

There has been significant demand for FHLDS guarantee places, including New Home Guarantee (NHG), with a total of 30,000 scheme places approved for issues to eligible lenders over the two years of operation, resulting in more than 24,000 settled purchases as at 28 June 2021.

Within four months of the scheme’s commencement on 1 January 2020, over 8,000 guarantee places resulted in settled purchases or were reserved by FHBs with pre-approved finance, while in 2020-21, around 9,600 of the 10,000 guarantee places were settled or reserved within four months of being made available.

“The speed with which each year’s allocation has been exhausted suggests there is significant unmet demand for places in the scheme (although demand of the New Home Guarantee has been less strong),” the report said.

The report – which was led by Flagstaff Partners senior adviser and independent reviewer under the NHFIC Chris Leptos – has split FHBs into three broad categories when considering the impact of the FHLDS.

The first is accelerated buyers, who would have otherwise entered the property market in the short to medium-term but whose access to the market was accelerated by the FHLDS. While they may not have had saved the standard 20 per cent deposit to buy property, they would have been able to access finance by utilising LMI, or perhaps a parental guarantee.

The second is genuinely additional buyers, who previously would have thought the property market was out of reach and would have been long-term renters. They do not have the standard 20 per cent required to avoid paying LMI and cannot afford to pay LMI. The FHLDS would represent “additionality” and provide access to the property market where it would not otherwise have been possible, particularly in the immediate future.

The third is capable buyers, who would have entered the property market in the short-term with or without the need for LMI. They would have the standard 20 per cent deposit but choose to use the FHLDS to borrow more (for a more expensive home), or to save less. The scheme has little effect on the timing of this cohort’s access to the property market but would provide something of a windfall gain.

Accelerated buyers had the most to gain

According to one submission to the review, one major LMI provider found that more than 75 per cent of FHLDS participants would likely have been eligible to borrow for a property without the support of the scheme within 12 to 30 months of their FHLDS-assisted purchase.

Furthermore, the scheme would appear to allow borrowers to purchase a property around one to two years earlier than they otherwise would have, the analysis showed.

This would suggest that the majority of beneficiaries of the FHLDS are accelerated buyers, the report said.

A review was also undertaken of NHFIC’s activities assisting additional FHBs to enter the market (as required by section 57 of the NHFIC Act). Although not the central policy intent of the FHLDS, evidence has suggested that the scheme is also assisting a proportion of FHBs that would not otherwise have been able to enter the property market (genuinely additional buyers).

The analysis by the major LMI provider found that around 12 per cent of FHLDS participants to date would have income levels lower than those which would be generally acceptable for non-scheme loans.

FHBs potentially stand to gain little through scheme

While the review has not been able to determine if the FHLDS has had any significant impact on property prices and noted that the scheme is small compared to the overall housing market, economists who spoke with the review said that standard economic theory suggests that assistance to FHBs that simply brings forward or adds to demand without a corresponding increase in supply is likely to result in an increase in house prices.

This could potentially eliminate any positive benefit to FHBs (with most of the benefits ultimately flowing to vendors, who already own property, or developers and builders of property).

“Housing prices, however, may not adjust as rapidly as some other asset prices and so the earlier cohorts of first home buyers that are supported by such schemes may be made better off, whereas those that purchase later on may not derive much benefit at all,” the report said.

The report has also stated that better data is required to assess the effectiveness of the FHLDS, including on the types of FHBs that have been successfully supported by the scheme.

[Related: FHLDS debt-to-income ratios fell in FY21]