Declining interest rates and rising incomes have meant that borrowing capacity and house prices have tracked each other quite closely over time. However, an issue can still arise for home buyers who are trying to enter the market because they need a deposit and the size of the deposit increases proportionately with the price of houses. Even a modestly priced house, say at $250,000, requires a deposit (comprised of a minimum of five per cent of the purchase price plus purchase costs, primarily stamp duty) of about $25,000. For a household with a moderate income, saving $25,000 could be quite challenging. While this issue arises most acutely in those parts of Australia where housing prices are highest (principally Sydney and Melbourne), as shown in Chapter 1 of this submission, house prices have risen all over Australia in recent years.
One way the Government could help home owners would be to allow special purpose savings vehicles to accumulate income with such income taxed at a low rate (preferably zero), provided the money is put toward a deposit on a house when it is withdrawn. Such schemes exist in the United States and United Kingdom and are called “investment savings accounts”.3
These accounts would provide people with an incentive to save for the particular purpose of first home ownership. While an investment-saving account scheme would be a demand side measure, there are reasons to believe that the benefits would not be capitalised into property prices. This is because the accumulation of deposit funds in these accounts would occur over a period of several years and so would not be of a windfall nature.
Care would need to be taken that only bona fide first home buyers benefited from this scheme, but that is true of current measures to help first home buyers.
Box 2.1 describes in more detail how investment savings accounts work overseas.