The $7000 First Home Owner’s Grant (FHOG) was introduced in July 2000 to encourage new buyers to enter the market. In October 2008, the deal was sweetened by the First Home Owners Boost, which added an extra $7000 for established homes and $14000 for brand new homes. Again, this was done in an effort to increase affordability and stimulate new housing starts in an already sluggish market. But did it really work? And now that the Boost has been removed, leaving the original grant amount of $7000, where do we go from here?

According to the Real Estate Institute of Australia (REIA), the removal of the boost is the wrong way to go. They argue that $7000 by today’s standards does not compare favourably with $7000 in the year 2000, and want an increased FHOG ($15,000) to ensure it maintains relativity. This is probably a fair point, with one caveat – it assumes that the grant was a positive step in the first place.

Prominent property analyst Michael Matusik strongly argues that the FHOG has done little to stimulate the market and has actually created more problems than it has solved. There is plenty of evidence to support this view. For example, in 1996 there were 318,200 Australian first home buyers with a mortgage. In 2006, there were 303,300, a 5% drop in first home owners. This is despite well over $6 billion being spent on the grant since its inception. Matusik suggests this is at least in part due to the price rises that have been artificially propped up by the grant – particularly in the below $350,000 category – effectively excluding the very people it was designed to assist. The numbers appear to support him.

Prior to the introduction of the FHOG, first home buyers were borrowing an average of $11,000 less than other home buyers. By late 2008, they were borrowing 6% more than other owner-occupiers. Ironically, this trend has effectively cancelled out any benefit the FHOG has offered. Specifically, first home loans have increased by an average of $20,400 since the boost was introduced, which obviously exceeds the amount of the grant itself. This certainly points towards the possibility of the FHOG having an artificial ‘propping’ effect on housing prices.

And the outcome of such an effect isn’t pretty. A recent survey by Fujitsu Consulting found that 45 per cent of the 26,000 surveyed borrowers (those who had entered the market since mid 2008) were experiencing ‘mortgage stress’ or ‘severe mortgage stress’. This is defined as a household spending a third of their income on home loan repayments. With interest rates set to rise, this is a genuine concern for the 12,000 borrowers who took advantage of the FHOG.

So was the grant a positive step? In hindsight, it may have interrupted the normal housing cycle and created problems for not only first home buyers, but anyone in the housing market. A further increase in the FHOG, as suggested by the REIA, would likely serve to deepen these problems. Michael Matusik has suggested other schemes to assist first home owners, such as removing the HECS debt and allowing access to super contributions. Hopefully the government will consider these options, rather than perpetuating a grant scheme that has already caused so much turmoil within the Australian housing industry.

Warm Regards

Robert Fuller

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