5% Deposit Scheme ... friend or foe?

Many first home buyers will be aware of the Australian Government's 5% First Home Guarantee Scheme.

With as little as 5% deposit (plus applicable stamp duty and fees) first home buyers can get into the market.

There used to be restricitive criteria, but the Government has thrown caution to the wind and made it an (almost) free-for-all.

Income caps are gone. You can now earn $10 million a year and still qualify for a 5% guarantee.

There were restrictive price caps, but these have been significantly extended. For example, the SE QLD price cap was $700k, now it's $1 million. Sydney has gone from $900k to $1.5 million!!!

There was a restriction on the number of places available per annum (35,000). Now it is uncapped.

These changes have opened up a big old can of worms.

The trouble is that the Government has thrown a barrel of petrol over the already simmering fire of the first home buyer market. By dramatically pushing the price caps out they have effectively repriced the market. First home prices will (quickly) gravitate to these levels as every man and his dog clamber to get a peice of the action.

They have unnecessarily fueled demand at a time when the housing market was already heaving under the weight of lower interest rates, high immigration and low unemployment.

This might have been OK if they had also thrown some serious resources at addressing the supply side of the equation ... but no. They have created a serious imbalance.

What happens when demand exceeds supply? Prices rise. I have seen this already in many markets, where over the past month we've seen "first home" prices increase dramatically, with dozens of people clamouring to buy what few houses come on to the market. Agents are listing on Thursday, open home Saturday, with offers presented by 4pm Sunday. They are encouraging would-be buyers to remove protective conditions. It's a shit-fight.

The Government may as well have written big fat cheques and sent these to real estate agents around the country.

The intention was to make it easier for first home buyers to get on the ladder. It appears that the opposite is happening. It's akin to economic vandalism.

What happens now? Well, Kiwis must make themselves aware of what is going on. Go with your instincts. Don't be pressured into buying a lemon or massively overpaying. Do your homework and seek advice. Get well prepared before you even consider putting in an offer.

These are the steps I encourage you to take:

1. Sort out your deposit - you need 5% (+ costs). Get this arranged / in your account. If relying on transferred Kiwisaver, get this approved and withdrawn so you have funds ready to go.

2. Get a home loan pre-approval. Get a good Kiwi broker in your corner; one who understands what's required and the specific needs of a Kiwi buyer that is new to the process of buying a home in Australia.

3. Get on the lists of agents and homebuilders so you can access new listings before they hit the general market.

And finally ... I think there will a time when the Government realises what a cock up this 5% scheme really is. At the moment it's a shambles. I reckon they'll realise the errors of their ways and introduce some sensible restrictions. Keep yourself informed.