22 May 2024

How much have First Home Grants really been helping buyers?

11:45 am on 22 May 2024
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In 2023, about 12,168 applications for a first home grant were approved. Photo: 123rf

It is understood that the government plans to drop First Home Grants and instead put the money towards more social housing.

But what is the scheme, how does it work, and how much has it really been helping?

Here's a rundown:

What is the First Home Grant, anyway?

The First Home Grant is the latest iteration of help for first-home buyers who use their KiwiSaver funds to buy a house.

To qualify, buyers have to be over 18, earn less than the income caps ($95,000 in the last year as a single person, after tax, or $150,00 for a couple or those with dependants), and have been contributing to KiwiSaver for at least three years at a rate of at least 3 percent of income or a minimum $1000 a year.

They also must buy within the price cap for their area, which varies around the country from $400,000 for existing properties in the Far North to $925,000 for new homes in Wellington and Queenstown.

This incentive has been around in various forms as long as KiwiSaver itself and was part of the initial 2005 KiwiSaver model. Previous versions were called the KiwiSaver deposit subsidy and KiwiSaver HomeStart Grant.

How much can you get?

Buyers of existing homes can get $1000 for each of the three years they've paid into the scheme - and up to $5000 if they have been contributing for at least five years. This rate is doubled for new builds.

That means a couple who both qualify can potentially access $20,000 for a new build, or $10,000 for an existing property.

How many people use the scheme?

In 2023, about 12,168 applications for a first home grant were approved.

Corelogic data shows first-home buyers made about 17,000 property purchases in that year.

But in many cases, two applications could be made for the purchase of one property. Auckland had the bulk of approved applications.

Mortgage adviser Glen McLeod said he dealt with a lot of applications using this grant.

Some people who could afford to spend more deliberately held themselves back to the price caps of their area to be able to qualify, he said.

It could also have a big impact for people who were trying to get together a 5 percent deposit to qualify for the government-backed First Home Loan. "It definitely does make a difference."

Does it help?

As prices have risen the impact of $5000 or $10,000 on a deposit will have lessened.

In July 2007, first-home buyers were paying a median $299,000. A 20 percent deposit would have been about $60,000. But that was before the introduction of loan-to-value ratios and buyers could sometimes get loans with much smaller deposits.

Now, first-home buyers are paying about a median $700,000 for their homes, which means a deposit of about $140,000 if they require 20 percent.

Infometrics chief executive and principal economist Brad Olsen said the grants would have helped some buyers.

"From a purely economic theoretical lens, the First Home Grants were effectively just a subsidy on housing for a certain group that generally bids up the price of housing - so good for those people that get the grant, but overall increases house prices more than without the grant.

"The solution to first-home buyers having a harder time given higher house prices is to expand supply rather than to subside a scarce resource."

But he said that took time so the grants were a practical solution.

"For some households they would've been reasonably important - a first-home buyer that meets some of the requirements could probably get a 10 percent deposit - for a house worth $400,000 to $600,000, getting up to $10,000 for a two-person household that've been contributing to KiwiSaver, that already has a 5 percent deposit, that First Home Grant could be worth up to a quarter of a 10 percent deposit or an eighth of a 20 percent deposit. So it likely did make a difference to those who were on the margins of having the deposit needed, if they met the other affordability requirements."

Corelogic chief property economist Kelvin Davidson said the size of the grants probably meant they were enough to "finish the job".

"It's a nice top-up of course, but I suspect that more important factors for first-home buyers have been KiwiSaver, access to low-deposit loans at the banks and reduced activity from other buyer groups. Lower house prices have certainly helped too, although whatever the supports that first-home buyers have been getting, they too have had to face up to much higher mortgage rates.

"So in a nutshell, the grants are likely to have tipped the balance for some people, but I'm also not sure that if they were taken away we'd see the first-home buyer presence in the market collapse."

What now?

Olsen said if it were true that the First Home Grant money was being recycled into social housing, it would not immediately or directly help first-home buyers.

"It might, at the margins, increase housing stock levels, and might free up a house in the private market that a first-home buyer can buy. But the switch from First Home Grants to social housing won't feel like it's supporting first-home buyers nearly as much."

Davidson said anything that would help new build construction come to market over the long term would be a bigger factor than the absence or otherwise of the grants.

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