Shared equity: Is buying a home with the government the answer to housing affordability?

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From stamp duty concessions and homeowner grants to home deposit schemes, there's no shortage of government initiatives available to aspiring homebuyers. And then there's shared equity - an idea which many Australians will have only recently heard about for the first time.

During the 2022 federal election campaign Labor announced its desire to roll out a national shared equity initiative called Help to Buy, and earlier this week the New South Wales government released details of its own Shared Equity Scheme as part of the 2022-23 state budget.

"Shared equity is a means of getting people into home ownership and giving them some material support to do so," says Dr Michael Fotheringham, managing director of the Australian Housing and Urban Research Institute (AHURI).

shared equity scheme help to buy housing affordability first home grant

"Essentially the idea is that where the price of purchase is too high, people within a particular income threshold can co-purchase with the government - so have a share of the equity.

"First-time buyers can then buy out the government's share and effectively purchase the equity back from them as their finances change over time. For younger first-time buyers, that tends to be as their income increases during their career and they can step up how much they're paying off."

In the case of Labor's Help to Buy scheme, the federal government is aiming to partner with up to 10,000 eligible first-time buyers each year and contribute up to 30% (existing homes) or 40% (new homes) of the purchase price in exchange for an equivalent equity stake in the property.

Participating homebuyers won't need to pay rent on the government's share of the property, and they can start to buy out the government's stake 5% at a time during the loan period if they're in a financial position to do so.

The initiative will also be limited to first home buyers who earn less than $90,000 individually, or under $120,000 as a couple, and there are a variety of purchase price caps that vary depending on location. These restrictions, says Fotheringham, should help ensure that the scheme doesn't add more upward pressure on house prices.

"A significant price increase because of this scheme is hard to imagine. I'm not concerned about that in this instance because of the thresholds with the scheme, both in terms of the income of the recipients, but also the price of the properties."

A 'tried and tested' model

The proposed national and New South Wales-based shared equity schemes aren't revolutionary ideas though. In fact, similar schemes are already operating around the world and on a smaller scale in other parts of the country, including the Shared Home Ownership program in Western Australia.

"There have been examples running very successfully in Western Australia and South Australia for many years, as have smaller schemes on the eastern seaboard," Fotheringham says. "There's international experience of this over the decades as well, so it's a tried and tested model."

Fotheringham sees the existence of both national and state-based schemes as providing more opportunity for eligible homeowners though.

"One of the benefits of these state-run schemes is that because we've got some dialogue between the Commonwealth and the states happening now, we're seeing things like the discussion of a one-stop shop where people can effectively speak to one agent who can work through which schemes someone is eligible for and then put them into the right one.

"For example, in Tasmania there are different income thresholds for the state-run scheme and the national scheme, so people will be able to choose the most appropriate one for their situation which maximises the benefit to the community as a whole."

Rising prices, falling ownership

So, what has led us to the point where, for many would-be first-time buyers, the only affordable way to own a home is via a considerable contribution from the government?

Unsurprisingly, the cost of a home in Australia is one contributing factor. Over the past decade alone the average national dwelling price has jumped from $486,900 in December 2011 to $920,100 in December 2021, and in states like New South Wales and Tasmania prices have more than doubled.

While prices have been rising, the level of home ownership among typical first home buyer cohorts has fallen over the decades. In 1971, 64% of 30 to 34-year-olds and 50% of 25 to 29-year-olds owned their own home, whereas in 2016 those levels of ownership had dropped to 50% and 37% respectively.

This isn't just an issue impacting younger buyers though. In a recent piece advocating for the introduction of a national shared equity scheme, the Economic Policy Program Director at the Grattan Institute, Brendan Coates, highlighted the fact that many older Australians are in a position where they can't afford a home.

"Home ownership is falling because it takes much longer today to save for a deposit. In the early 1990s it would take the average Australian about seven years to save a 20% deposit for a typical dwelling. Now it would take almost 12 years.

"Meanwhile older renters with a deposit won't be in the workforce long enough to pay off a home by the time they retire, even at today's record-low interest rates."

What else can be done?

Because of the extent of the housing affordability problem in Australia, Fotheringham says that shared equity schemes aren't a panacea by themselves.

"Shared equity is an important ingredient in building a coherent approach to housing challenges. But we need a comprehensive strategy because there's no single solution that's going to fix this.

"First and foremost, that needs to involve coordination between the Commonwealth and states because that dialogue has been missing for a number of years, so it's important that comes back. The new federal government has already talked about the need for a national housing strategy that involves all levels of government."

As part of that overall strategy, Fotheringham believes that governments need to increase funding for homelessness support and social and affordable housing, as well as expand beyond the home ownership models that already exist in Australia by exploring options such as community land trusts and other forms of co-ownership.

There's also the ongoing issue that, as a nation, we simply don't have enough homes to meet demand.

"We have an overall supply shortage," he says. "Demand is growing faster than supply, so we're not actually keeping up at the moment.

"For years we've barely kept up, but with the various disruptions that have come from the pandemic and now with the war in Eastern Europe, the supply issues are making that all the more difficult."

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Tom Watson is a senior journalist at Money magazine, and one of the hosts of the Friends With Money podcast. He's previously worked as a journalist covering everything from property and consumer banking to financial technology. Tom has a Bachelor of Communication (Journalism) from the University of Technology, Sydney.