HomeStart Scheme will not fix houseing affordability

Why the Government’s HomeStart Scheme is Not a Solution to Housing Affordability

Geoff SimmonsEconomics12 Comments

In response to questions about housing affordability on Sunday’s Q&A Nick Smith announced changes to the Kiwisaver HomeStart scheme. He is increasing the income and house price caps for people to qualify for the subsidy. This policy has failed to improve housing affordability anywhere in the world and simply won’t work here. It is encouraging more people into even more debt that they can’t afford, at a time when even the Finance Minister is advising people to think twice before buying their first home.

It was a shame that Q&A allowed the Minister to announce this policy without challenging him on whether it will be effective.

Minister Smith’s announcement

Kiwisaver HomeStart allows ‘middle income’ first home-buyers to access a subsidy for their first home of up to $5,000-10,000 for an existing home and $10,000-20,000 for a new home in addition to using their Kiwisaver as a deposit.

Here are the details of Minister Smith’s announcement:

  • The income cap for a single person will rise from $80,000 to $85,000
  • The income cap for a couple will rise from $120,000 to $130,000
  • The house price cap for Auckland will rise from $550,000 to $600,000 and $650,000 for a new house
  • The house price cap for Wellington, Christchurch, Hamilton, Tauranga, Queenstown and Nelson-Tasman will rise from $450,000 to $500,000 and $550,000 for a new house
  • The house price cap for the rest of the country will rise from $350,000 to $400,000 and 450,000 for a new house

So basically more people can access a taxpayer subsidy to buy increasingly expensive homes.

This scheme is a terrible idea for a three main reasons. Firstly it unashamedly helps the middle class, not those that actually need it. Secondly because it will help people get into ludicrous amounts of debt at a time when the market is already unaffordable. Thirdly it is doing nothing to fix the problem, in fact it is throwing petrol on the blaze by just boosting demand even further.

Will this make housing affordable?

This policy is designed to encourage ‘middle-income’ people to get into more debt at a time when the housing market (nationwide, but particularly in Auckland) is at record levels of unaffordability. It is encouraging young people to take a massive risk at a time when even the Finance Minister is cautioning first home buyers to wait. This seems like a case of very mixed messages from the Government.

Let’s look at an example of a single person earning $85,000 buying a $600,000 home in Auckland. Firstly this is seven times their income (the international definition of affordable is three times) and they will be lucky to find the house at all (the median house price was $821,000 in June). To make the purchase they will need $120,000 deposit, leaving them with a debt of $480,000. On current interest rates (4.5%) repayments would cost them around $600 per week – around 47% of their post tax income (repayments of up to 30% of household disposable income is considered affordable). That is onerous enough, but what if interest rates rise by a measly 1%? Repayments would rise to $80 per week – eating up over half of their income.

Is it really a good idea for Government to subsidise first home-buyers to get up to their necks in debt?

First home subsidy schemes haven’t worked overseas

Other countries in the world with a scheme similar to this have overheated housing markets; including the UK and Australia. It doesn’t work as a policy and it is obvious why if you give it a moment’s thought. Housing is already off the charts in terms of affordability. If you subsidise people to buy houses, that will only increase the demand for housing, which only succeeds in increasing the price.

Our housing market already has massive tax subsidies to the tune of several billion dollars. All this policy does is throw a few million more of taxpayers’ money into the equation. It is throwing good money after bad. We need to wean ourselves off our addiction to housing, not make it worse.

Why the Government’s HomeStart Scheme is Not a Solution to Housing Affordability was last modified: August 15th, 2016 by Geoff Simmons
About the Author

Geoff Simmons

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Geoff Simmons is an economist working for the Morgan Foundation. Geoff has an Honours degree from Auckland University and over ten years experience working for NZ Treasury and as a manager in the UK civil service. Geoff has co-authored three books alongside Gareth.

12 Comments on “Why the Government’s HomeStart Scheme is Not a Solution to Housing Affordability”

  1. the problem with democracy is that we usually end up with self serving dick heads(politicians) making bad decisions over and over again. this is just the latest.

  2. Entirely agree. The whole notion of Kiwisaver was to be a retirement fund – that wouldn’t be invested in property but income and employment generating business. Instead, all we encouraging people to break open their piggy banks and get into the property speculation game. If anything, Kiwisaver should NOT be allowed to be liquidate for housing. The problem of un-affordability is systemic, not economic.

  3. Hi Geoff enjoyed the article. Can you explain the relationship between debt growth and the property boom. I heard that private debt increased last year by 8%. Is this debt mainly going into houses and does such growth in debt mean ever decreasing interest rates to stimulate the economy.

  4. As someone who is planning on using their kiwisaver for the purpose of buying a first home then yes I’m all for it. I don’t see it making housing more affordable as such because house prices are out of reach of many but for those like me who have difficulty saving a deposit (due to ex leaving me with all household debt forcing me to sell my last house) then this is a helping hand. I’m going to be sensible though. The house we buy is our house for life not for speculating on the market in the future so it allows us stability. We can afford to pay mortgage repayments and we know our upper limit of borrowing should interest rates increase 2 or 3 fold and we won’t go over that limit. Luckily there are still houses where we live but obviously we’re not in Auckland. The policy change will help us and probably a few others but is it going to solve the housing crisis and affordability then no

    1. Will you qualify? You’ve said you had to sell a previous house, due to a relationship failing, so would a subsequent house purchase qualify as a ‘first home’ under Kiwisaver rules?

      1. Yes you just need to be in the same position as a first home buyer as determined by housing corp nz. I’ve read all the rules and I thankfully meet the criteria.

  5. Repayments would rise to $80 per week – eating up over half of their income.?

    Number correction?

    Very much a middle NZ subsidy as you could argue is the Kiwi Saver govt top up or even the compulsory employer kiwi saver matching contribution. The govt is pandering to its voting base rather than trying to improve the overall situation. Has the Morgan foundation looked at how really strict rental WOF’s or rent controls could impact the housing market? It seems while renting may still be more affordable than a mortgage rent costs are increasing far faster than inflation(amongst people I know anyway) even outside of Auckland.

  6. Just wondering how many more years New Zealanders will put up with this government before they finally vote them out. About 48 percent of the voting population seem to have an extraordinary resilience for taking punishment.

  7. I am wondering if the Morgan Foundation or a member of the public knows of a calculator to compare renting vs buying costs over a 25 – 30 year period factoring in mortgage repayments, rates, maintenance, capital gains, insurance etc. for the house buyer but also factoring in insurance and capital gains from the renter investing what would have been a deposit. i.e. investing in stocks. I am trying to find a tool to do this compairison over the long term. Thanks

  8. You forgot rates, maintenance and insurance. $100/week – give or take a bit – is a pretty reasonable number for that.

    Also worth mentioning is that when people took on lots of debt in the past it got softened over time by inflation. Not happening right now or likely to happen any time soon. If it did, the RB response would be to raise interest rates.

  9. Geoff, is there any chance your webmaster could change from the current grey font to a black one, please? My 75 y-o eyes struggle to read your posts!

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