Why first-home buyers could finally catch a break

After decades of falling homeownership for under 45-year-olds, property seems to be a little more affordable. Why? First-home buyers are no longer competing with property investors for existing homes.

Over the past two decades, there has been a sharp drop in the number of young Australians owning property.

Homeownership among 35- to 44-year-olds fell from 76% in 1981 to 57% in 2021, according to the Australian Bureau of Statistics.

Why first-home buyers face less competition

The government's changes to negative gearing and capital gains tax in the recent Federal Budget make investing in property less attractive.

So instead of coming up against cashed-up property investors, first-home buyers are more likely to be competing for existing homes with others who are in the same boat.

Before the changes, property investors accounted for 40% of all new home loans.

Further increasing the availability of affordable homes to first-home buyers, the government has banned foreign property investors from purchasing existing homes in Australia until mid-2029.

How the 5% deposit scheme is helping buyers

Another measure to help first-home buyers is the 5% deposit scheme.

About 250,000 Australians have made use of this scheme, formerly the Home Guarantee Scheme, since it began in 2020.

The scheme has made it possible for 172,000 Australians to buy homes in urban areas, and more than 81,000 have purchased property in regional and remote Australia.

This is great news for first-home buyers. Owning a home offers financial security, and rent hikes over the past several years have been punishing.

While mortgage repayments eventually come to an end, paying rent goes on forever.

How higher interest rates cooled the property market

It's not just the government changes to negative gearing that have slowed down property prices.

Buyers have also been spooked by a string of interest rate increases.

My family and I have breathed a sigh of relief. The cooling property market not only takes some of the pressure off my adult children who want a toehold in the market, it helps parents wanting to fund adult kids into property.

These days there's almost an expectation to be the Bank of Mum and Dad and bankroll kids into property. And the average gift or loan from parents to adult children keeps rising too. I know parents who raided their superannuation, leaving their own retirement plans in tatters.

Or parents working into their seventies to help their 30-something children. Other parents have passed on their own inheritances to their children to give them a financial boost.

The growing role of the Bank of Mum and Dad

It surprises me how determined some parents are to get their kids into property.

One couple is considering giving their daughter and her young family their family home and buying a small unit in the same suburb to be close by.

Other couples sell the family home to move closer to their children because they can't afford to buy near their parents and they need help with childcare. It is common for adult children, and often their partners, to live with their parents for years so they can put rent money towards a home deposit.

For children without the support of a benefactor, housing and student debt can be a struggle, and this is where the 5% deposit scheme can make a difference.

What the negative gearing changes mean for investors

For anyone who is a fan of negative gearing, it still applies to newly built housing from July 1, 2027.

People sometimes overextend themselves with poor-quality investment properties simply to be eligible for a tax benefit from the government.

But negative gearing is only an advantage when interest paid is greater than net rental income. While the negative gearing of income is grandfathered under the government's changes, what isn't well understood is that future capital gains will now be taxed differently.

A tax offset for inflation now applies. But this is a minor discount over the short term.

Most of your capital gain will be taxable, so the investment arithmetic for a negatively geared investment changes.

A property investment needs to appreciate meaningfully in the future on a consistent basis to make it worthwhile continuing. If it goes backwards or flatlines, you've been paying a cash deficit with insufficient recovery from the capital gain after tax.

How to buy a home with just a 5% deposit

The government ramped up the scheme so that all first-home buyers can buy a home with a 5% deposit.

Single parents or legal guardians of one or more dependants can apply with a minimum 2% deposit.

Usually you need a 20% deposit to avoid paying lenders mortgage insurance (LMI), but the government guarantee means first-home buyers are exempt from paying LMI, saving them tens of thousands of dollars.

To be eligible, the property must be residential and its purchase price and property value must be at or below the location's price cap, which varies by state, city and regional area.

For example, if a first-home buyer pays $820,000 for a home, a 5% deposit is $41,000, instead of $164,000, which would be needed as a 20% deposit to avoid LMI.

The government has shaved more than $2.3 billion off LMI costs and taken years off the time it takes to get into a home.

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