The media is again full of chatter about the housing affordability crisis in Australia. Property markets have gone on a tear as mortgage rates bottom at levels close to matching inflation. Governments are subsidising a building boom to save the economy from COVID, and the resulting collapse in immigration.
A reduction in international students and an e-worker exodus from Melbourne and Sydney has created a paradox – improving rental affordability in inner city areas, but a rental crisis in the regions. Non-east coast markets are also taking off, as yield compression begins to take hold in areas which have remained relatively untouched in previous east coast booms.
Amid all the chaos, a Victorian Government housing program is growing in significance – HomesVic Shared Equity. Introduced in 2018, it allows eligible first home buyers to receive a joint equity contribution from the Government of up to 25% of the property’s value. This reduces mortgage servicing costs and enables buyers to purchase with a minimum 5% deposit of the total property value.
This is increasingly critical for first home buyers, as affordability issues are largely driven by yield compression. Mortgage service costs are at record lows due to low mortgage rates. But low interest rates have sent prices so high that the deposit requirements are around 6 figures, making saving for a deposit impossible for many.
A general criticism of these demand side provisions is that they increase prices. Ironically, this is why they face such little public opposition. However, the benefit of these Shared Equity schemes is that they are more sustainable than egregious Stamp Duty discounts and First HomeBuyer Grants. Instead of pumping ever increasing amounts of public money to subsidising private property wealth accumulation, it socialises a share of the capital gains (or losses) that would otherwise accrue to new homeowners. Whilst the program marginally adds to land prices, the model’s big advantage is that the program can be self-funding.
Shifting the risk and reward of changes in land value from private homeowners to the public is a sound policy. Homeowners have no influence over their land value – it makes no sense to force them to pay a higher lump-sum for a right to capital gains in land value that they themselves have no control over. It is better for this risk to be borne by the entity with the lowest borrowing cost – the government.
The scheme allows provisions for owners to make renovations to their property, without the added improvement value being shared with the government. Although some restrictions still apply in what can be an “approved renovation”, these limitations are minor compared to freehold ownership, and far more liberal than private rental.
Finally, there is a hidden subsidy embedded in the scheme which sweetens the deal. Participants are not required to cover the interest costs on the government’s share, which in reality is the government bond rate.
More significantly, the government’s share of the property does not come with a rental fee attached. The government buys 25% of your property for you, but they don’t charge you 25% of the market rent that their share of the property should generate. They also don’t pay their 25% of the property’s costs e.g. insurance, rates, utilities etc. However this gift of 25% of the Net Annual Rental Value to the participant is very significant, and makes the program more affordable than private rental.
By all accounts, shared equity participants come out ahead. The main risk to the government is that due to their equity stake being 25% of property value, they also purchase and experience depreciation on their share of the improvement value. If land value growth fails to outpace depreciation and the government bond rate combined, then the government will lose money on this scheme.
There is also the adverse selection risk that participants will buy their home during market downturns, and magnify the risk of losses. In any case, it is still an improvement over existing buyer subsidies and tax concessions where no subsidy is retained. The next move for governments should be a model that retains the full public subsidy for perpetually affordable housing. Passive land nationalisation may just end up being the inevitable path forward out of the Political Economy quagmire of private freehold homeownership.