Could state governments provide deposits for first home buyers?

New South Wales Premier Dominic Perrottet has really put the cat among the pigeons with his plan for the government to partner with first home buyers.

While the details of the plan are still being finalised, the idea has the potential to dramatically reduce barriers to first home ownership, with the deposit contribution from the government effectively making them a part equity owner.

First home owners could then either buy back the equity by paying instalments or when the property was sold.

Parents of homebuyers could also use the equity in their property to act as guarantors for the first home buyer.

While the details of the scheme will be important – particularly around interest rates (if any) and the percentage partnership and amount the government is willing to assume – the idea has the potential to spread around Australia and particularly to Victoria.

The potential for such a spread was shown when the Queensland Government abolished death duties in 1978 – a move which led to the other states following to stop the potential flood of seniors to the Sunshine State.

Removing home ownership hurdles is good business

State governments are effectively in competition to attract people to their states and anything that removes home ownership barriers would be a significant advantage – particularly given current sky-high prices.

Victoria can ill afford to start losing population northwards, so it would not be a surprise to see a similar scheme start in the other states if it proves popular.

From the government point of view, if the scheme is well designed, it is a no brainer.

The state might be taking on a bit of property price risk but that has been a one way bet with the odd interruption for decades.

States could get exposure to property and more tax revenue

However, the state still gets paid stamp duty for the purchase and a raft of other tax revenue because first home buyers also need to buy plenty of furniture and other goods.

More home owners means a more stable and reliable tax base and workforce so there are many advantages for the government.

The benefits for first home buyers are probably more arguable because many similar assistance programs and grants have simply been quickly built into higher prices, negating the assistance.

In this case, because the equity partnership is only available to first home buyers, there is perhaps less chance of a generalised increase in property prices, although properties suitable for first-home buyers could suffer some disproportional price inflation.

Could first home buyers finally beat off investors?

Arguably, the scheme would help to even out the playing field a little with investors, who are supported by other policies such as negative gearing and the capital gains tax discount.

It would also help first-home buyers who don’t have access to the “bank of mum and dad” which analysis by Digital Finance Analytics put as now being Australia’s ninth largest mortgage lender.

The average borrowed from the bank of mum and dad is $89,000 and has been rising by around 20% a year to keep pace with rising property prices.

Premier Perrottet has long expressed concerns about home ownership and affordability and this policy now looks like a key election for next year’s state poll.

Other final details of the policy are still being worked through, including a potential cap on the amount the government would contribute, or the price of the property or land.

“Increasingly younger generations think being able to buy their first home is unachievable, and for me, that’s unacceptable,” Mr Perrottet said at the policy launch.

“As a parent, I would happily sacrifice some equity in my home if I knew it would give my kids a foot in the door to our state’s property market.”

Social housing stock and other options also on the table

The NSW Government is also considering increasing the stock of social, affordable and Aboriginal housing, as well as a program to transition low-income earners from renting to property ownership.

Build-to-rent initiatives and fast tracking of developments are among other options being considered.

When he was Treasurer, Mr Perrottet last year proposed that stamp duty could be replaced by an annual property tax, with buyers given the chance to either pay stamp duty upfront or pay a smaller annual tax in perpetuity when buying their next home.

That measure has now been put on the backburner pending federal support.

So far, the ACT is the only Australian government which is moving to gradually replace stamp duty with annual tax payments.