Why government housing incentives lead property investors astray

There’s a host of government incentives available to prospective property purchasers in Victoria at the moment.

However, while any financial boost is welcome when working towards property goals, it’s vital prospective buyers don’t chase incentives at the expense of foundational purchasing and investment objectives.

Incentives must be seen as part of a long term plan, not just an expedient means to buy property.

The suitability and benefits of the incentives on offer will differ for homebuyers and investors.

The Victorian Government’s First Home Buyers Grant for example provides $10,000 for people buying a home less than five years old in non regional areas, while $20,000 for properties in regional areas.

While those amounts provide a significant boost to purchasing power in the short term, buying a property in a regional area is unlikely to provide the long term capital growth compared to a smaller property within inner metropolitan areas.

Although there has been a recent post-COVID spike in regional prices, CoreLogic data shows in the 10 years leading to 2018, combined regional dwelling prices increased by 13.7 per cent, much less than the 50.7 per cent price rise across the combined capital cities.

It’s a similar story when buying a new property in the outer suburbs, which again is unlikely to provide the long term capital growth compared to a smaller established property within inner metropolitan areas.

It’s also helpful for prospective buyers to understand the political imperatives behind housing incentives.

While they are certainly designed to stimulate home ownership, they are also part of a much larger picture, particularly as the Federal and State Governments work to bolster the post COVID-19 economic recovery.

New housing for example doesn’t just provide more homes, it also stimulates broader business activity, creates more jobs and eventually leads to greater government revenues.

That’s a noble outcome broadly speaking, but might not correspond with buyers’ personal financial and investment interests.

Having taken all this into account, what’s the best approach to determine whether the incentives on offer compliment long term property ownership goals.

As mentioned earlier, their suitability and benefits will differ between homebuyers and investors.

Long term homebuyers

Long term homebuyers looking for a place to live will have a larger focus on ‘needs and wants,’ such as location, style and accommodation, as well as access to services, schools, transport, work and family.

Livability and lifestyle may take preference over capital growth. Therefore they may be suited to a new property or one under development in an outer suburban growth corridor or regional area.

This would give them access to a broad range of the incentives on offer, particularly if it’s their first home.

Stepping stone homebuyers

On the other hand, stepping stone homebuyers will see the home as a means to climb the property ladder.

While  lifestyle elements are important, they may be happy to compromise on ‘needs and wants’, and buy an established home within an inner suburban area to maximise long term investment gains, but in doing so forgo some of the government incentives on offer.

Given the inner suburban area, the land size is likely to be smaller than new developments, the dwelling more modest, and perhaps needing improvements. However, the location should provide greater capital growth.

In this case the property’s scarcity value, land component and multi-faceted demands for different buyer types will be key to purchasing decisions and long term investment growth.

Stepping stone homebuyers need to think like an investor and realise that ‘free money’ in the form of government incentives may cost more than save in the long run.

Dedicated investors

Those purchasing a dedicated investment property will have two major focus areas to consider: rental yield and capital appreciation.

Investors looking for rental yields may suit new developments in regional areas, which can offer stronger yield potential than metropolitan areas, and in doing so they can capitalise on the associated incentives.

However it’s important to consider issues such as build quality, vacancy rates and tenant quality.

Rates, management fees and repair work also need to be taken into account.

Investors looking for capital growth should focus on similar attributes to stepping stone homebuyers. Again underlying land value, property type scarcity and multifaceted demand will drive longer term price growth.

Likewise, as buyers will be targeting established homes within inner suburban areas, they will forgo some of the grants available for new homes in regional areas.

Broader market impacts

Ironically, housing incentives can also actually lead to purchasers having to pay more for their property, not less.

Incentives have the tendency to push up prices and demand in specific market segments.

January 2021 Australian Bureau of Statistics data shows the number of owner occupier first homebuyer loan commitments rose 70.8 per cent from January 2020.

According to the ABS, that’s the highest level since May 2009, when similar rapid growth was spurred by the temporary tripling of the first homeowner grant in response to the global financial crisis.

This obviously leads to increased competition and higher prices for properties within first homebuyers’ reach.

Take home message

It’s vital purchasers understand how to adequately navigate, judge and decide on the merit of particular incentives when applied to their financial and property investment decisions.

Most importantly it’s vital prospective buyers remain true to their purpose, and don’t get distracted by government incentives that can lead to the wrong purchasing and investment outcomes.

Like tax breaks, government incentives should not dictate buying decisions, but be seen as an added bonus.

Remember government incentives aren’t always designed with buyers first and foremost in mind, so only use them if they compliment foundational purchasing goals.

For a more detailed insight of exactly what’s on offer, we’ve compiled a list of property incentives available for prospective buyers in Victoria.

Property incentives available in Victoria

Victorian Government

First home buyers grant

  • Applies when buying or building a new home valued up to $750,000
    • Properties in regional areas receive $20,000
    • Properties in non-regional areas receive $10,000

Stamp duty reductions 

  • Up to 50 per cent reduction in stamp duty on homes worth up to $1 million
  • New builds eligible for the full discount, existing homes receive 25 per cent

Victorian Homebuyer Fund

  • Subsidised purchase price for buyers in exchange for a proportionate equity interest in the property
  • Allows eligible buyers to purchase a home with as little as 5 per cent deposit
  • Government contributes 25 per cent of the property value to deposit, then maintains a proportional interest in the property and receives it back when the property is sold

Federal Government

First home loan deposit scheme FHLDS (New Homes)

  • Under the Scheme, eligible first home buyers can purchase or build a new home of up to $850,000 with a deposit of at least 5 per cent

First Home Loan Deposit (Existing Homes)

  • Eligible first home buyers can purchase a home up to $600,000 with a minimum deposit of 5 per cent

HomeBuilder Grant 

  • Provides eligible owner-occupiers with a grant to build a new home, substantially renovate an existing home or buy an off-the-plan home/new home
  • A $15,000 grant for building contracts signed between 1 January 2021 and 31 March 2021
  • $25,000 where the contract is signed between 4 June 2020 and 31 December 2020
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