Single parents, first home buyers and downsizers have emerged winners in a big spending federal budget that aims to get people into the property market sooner. But some warn the measures could cause ‘unintended consequences’ for Australia’s most vulnerable.
A faster-than-expected economic recovery and soaring commodity prices have given the government plenty of additional money to play with in this year’s federal budget, but rather than moving to fiscal repair, the government will continue to spend in an effort to safeguard economic growth and drive down unemployment.
“At 5.6%, unemployment today is lower than when we came to government,” said Treasurer Josh Frydenberg, while handing down his third budget on Tuesday.
“Australia’s economic recovery is now well underway and we must keep the momentum going.”
As part of that momentum, Mr Frydenberg unveiled several programs aimed at helping more people into home ownership, while also trying to entice empty nesters to downsize by extending access to a superannuation contribution scheme.
“We will allow those aged over 60 to contribute up to $300,000 into their superannuation if they downsize their home, freeing up more housing stock for younger families,” said Mr Frydenberg.
Single parent family could purchase a house with a 2% deposit
With property prices forecast to rise by between 10% and 17% nationally this year according to economists at Australia’s big four banks, breaking into the housing market is becoming harder by the day.
The government plans to alleviate some of the barriers to entry with several new and expanded measures, allowing eligible buyers to buy sooner with a smaller deposit.
Under the move, single parents with dependent children could secure a property with a deposit of as little as 2% under the new Family Home Guarantee, which would see the government act as a guarantor on the loan, therefore removing the need for lenders mortgage insurance (LMI).
Typically, home buyers with a deposit of less than 20% are required to pay LMI, which can add thousands of dollars to the loan over several years.
Am I eligible?
From July 10,000 places will be made available over four years for single parents earning less than $125,000 annually, subject to their ability to service a loan.
The policy is not limited to first home buyers, although applicants may not currently own a property.
How it works:
A single parent hoping to purchase a $460,000 home would typically need to save a 20% deposit of $92,000 to avoid paying Lenders Mortgage Insurance.
Under the Family Home Guarantee, and on the success of their application with a lender, they could secure the property with a 2% deposit of $9,200.
Combined with state incentives, such as the first home buyers grant and stamp duty waiver (if eligible), the cost of entry could be even lower.
While the government acts as a guarantor on part of the loan, it’s important to remember the guaranteed amount will eventually need to be repaid.
EY Chief Economist, Jo Masters said the measures could potentially land some recipients in hot water.
“The new housing policy aimed at single parents is one example where we can anticipate the unintended consequences – being some of society’s most financially vulnerable people burdened with a 98 per cent loan-to-value ratio at a time when housing is running hot,” said Ms Masters.
The Australian Council of Social Services (ACOSS) said the budget missed the mark on housing supply issues.
“We still tonight have absolutely nothing to lift the affordability of housing for people,” said ACOSS CEO Cassandra Goldie.
“It does nothing to address the severe shortage of social housing or raise social security payments above the poverty line.”
First home buyers deposit scheme expanded
An additional 10,000 places will also be up for grabs for first home buyers hoping to avoid lenders mortgage insurance with an expansion of the First Home Loan Deposit Scheme’s new homes program, the New Home Guarantee.
The scheme allows eligible first homes buyers to build a new home or to purchase a newly constructed property with a deposit of just 5%, with the government acting as guarantor for the remaining 15%.
That is in addition to the 10,000 places introduced in last October’s budget for the purchase of existing homes, which will also become available from July.
“Both the First Home Loan Deposit Scheme and the New Home Guarantee have proven their value in assisting Australians to buy their first home sooner,” said HIA Managing Director, Graham Wolfe.
“Matching the 10,000 places still to open under the Deposit Scheme from July with a new allocation of 10,000 places under the New Home Guarantee will help ensure first home buyers can choose to buy either a new home or an existing home,” he said.
Super saver scheme cap increased
The First Home Super Saver Scheme (FHSSS) has also been tweaked to allow first home buyers to save a deposit faster through their superannuation.
The scheme allows first home buyers to make voluntary contributions to their superannuation fund, capped at $15,000 a year, to take advantage of the special tax treatment of super.
Currently, the maximum they can save under the scheme is $30,000, but from July 2022 the maximum amount of voluntary contributions that can be released from the FHSSS will increase from $30,000 to $50,000.
“This increase will fast-track home ownership for first home buyers,” the budget papers said.
“It recognises that deposits required for home purchases have increased over the years given house price growth.”
Push to free up more homes
In an attempt to free up more homes for younger families the government is also extending access to downsizer contributions.
From July 2022, the minimum age for the downsizer contribution will be lowered from 65 to 60, allowing those nearing retirement age to make a one-off post-tax contribution of up to $300,000 per person, or $600,000 per couple to their superannuation when they sell the family home.
“This improves the flexibility for Australians to contribute to their superannuation savings, and may encourage people to downsize sooner and increase the supply of family homes,” the budget papers said.
But there are doubts over how many people will make use of the amended scheme.
“People have already been able to make non-concessional contributions of $100,000 per year (more with bring-forward arrangements) so I’m not sure that not being able to put the money into superannuation has been a big impediment to downsizing,” said REA Group economist Paul Ryan.
“The big issue remains that the exemption of the family home from the pension assets test encourages retirees to maintain wealth there to maximise pension receipts,” he added.
How do I apply?
Many of the measures aren’t scheduled to take effect until July 2021 at the earliest, and are contingent on the government getting legislation passed by parliament.
You should speak to your Smartline Adviser to discuss your options moving forward, and whether any of these policies could be right for you.
What the big-spending budget could mean for interest rates
A speedier recovery and soaring iron ore prices left the budget in better shape than previously forecast in the December Mid-Year Economic and Fiscal Outlook (MYEFO).
The government’s decision to spend any additional savings, rather than focus on budget repair has taken many economists by surprise, with some suggesting the additional stimulus could force the RBA to raise rates sooner than expected.
“The Government has announced new spending worth $95.9 billion over the five years from 2020-21, which is almost enough to offset the improvement in the fiscal position of $104.3 billion from the stronger economy,” said ANZ Head of Australian Economics, David Plank in a note.
“This level of spending despite the strong economic recovery was a surprise to us and shows a strong commitment from the Government to its new fiscal strategy of continuing to spend until the unemployment rate is below where it was prior to the pandemic.”
And that could potentially lead to a faster-than-forecast lift in wages growth and inflation.
Currently, the RBA predicts unemployment will need to be in the low 4s – and possibly even lower – to drive inflation sustainably within its 2-3% target range.
But Treasury is more optimistic, with recent modelling suggesting inflation and wages growth could rise once unemployment reaches between 4.5% and 5%.
Tuesday’s budget forecast the unemployment rate will reach 5% by June next year, and fall to 4.75% by June 2023. The unemployment rate was at 5.6% in March 2021.
Economists at Australia’s largest lender, the Commonwealth Bank said the additional stimulus could have implications for monetary policy.
“The cash rate is expected to remain on hold at 0.1% over the coming years, with the RBA persisting with the ‘2024 at the earliest’ forward guidance,” said CBA Chief Economist, Stephen Halmarick.
“However, the extent of the fiscal policy stimulus announced in the 2021/22 Budget does raise the risk of a stronger economy and lower unemployment rate in the years ahead, holding out the risk that the RBA will need to raise the cash rate before 2024.”
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