Many first home buyers think that if the proposal to abolish negative gearing on existing property was enacted, they’d be better off. Many have said that they believe they’d finally get the chance their parents had, to buy a decent home close to the city.
This belief is simply not true and here’s why;
The main barrier to affordability for young people today is not actually the purchase price. It’s in getting together the upfront deposit of 20% (many lenders won’t lend more than 80% due to the new APRA requirements, or if they do, they charge a hefty mortgage insurance) as well as the high stamp duty fees, which vary in every state.
This big chunk of cash is hard to save up and won’t become much easier, even if house prices fall from their current levels. Here’s an example – if a $500K house in NSW dropped in value by 10%, the purchase price falls to $450K. The deposit also falls, but only from $100K to $90K, while the stamp duty only falls from circa $18K to around $16K. Total upfront costs have gone from $118K to $106K. Yes, it’s less, but still numbers that are completely out of reach for many young people.
Interestingly, when it comes to loan repayments, the baby boomers actually had it far worse than today’s young people, as they had to pay 18% interest rates compared to current discounted variable loan rate of around 4.75%. Finder.com.au recently release a report showing the average baby boomer had to spend 47% of their take home pay to service the average mortgage, whereas young people today have only to commit 31% of the average income to pay the average mortgage.
Now let’s look at the downsides of the policy if it’s enacted. Unemployment will rise, meaning first home buyers (amongst others) may not even have job security and on top of that, rents will rise, making it even harder to save up that deposit.
There are other, better ways to improve affordability than enacting a policy that will endanger the economic freedom of every Australian.