Will the HomeBuilder grant spur demand?

By Gerv Tacadena | 15 Jun 2020

The federal government's HomeBuilder scheme, which is its latest attempt to boost the construction and housing market, might not necessarily spur additional demand amongst would-be home buyers, according to an expert.

Eliza Owen, head of residential research at CoreLogic, said the scheme could have a “vacuum effect” on the market, wherein instead of creating additional demand for building work, it may only bring construction activity forward.

The vacuum effect – a term that was first used in a study from the City Futures Research Centre – happens when there is a surge in buyer activity soon after a housing stimulus is unveiled and a significant drop in activity after the scheme lapses.

"The implication is that rather than stimulating sustained, new demand, stimulus is simply bringing forward activity to a certain date, where it would likely have occurred over time anyway," Owen said.

The HomeBuilder scheme is a temporary program that aims to provide a $25,000 grant to eligible applicants who are planning to build a new home or substantially renovate their existing property. Applications will be accepted until the end of this year.

Also read: Right Timing For Housing Grants?

Owen said the time frames and the price caps of the HomeBuilder scheme indicate that its most likely targets are people who already have plans to buy or renovate.

"The kind of planning and financing that needs to be organised for a six-figure renovation means that it would largely be taken up by those who have already started the process," she said. "Similarly, for homeowners, and first-home buyers, in particular, those looking to commit to a property purchase within the next six months would already have been saving a deposit and primed to buy."

The scheme sets a price cap of $750,000 for the construction of a new home. This value includes the land on which the property will be constructed. For renovations, the project should be valued between $150,000 and $750,000, and the dwelling should not be valued at more than $1.5m.

"For areas where dwelling prices and incomes are relatively low, this may lead to owners over-capitalising on renovations, where they cannot recoup the cost of upgrades to the property," Owen said.

Sarah Megginson, managing editor of Your Mortgage Australia and Australian Broker, raised similar concerns about the price caps set by the grant.

"You need to spend at least $150,000 on your home upgrade to get a grant worth one-sixth of that value. It is nice, but hardly enough incentive to push someone from 'should I renovate?' to 'what an opportunity, I must renovate!'," she said in a LinkedIn post. "How many single people on, say, a $90,000 income can afford a $150,000 reno on their $700,000 home especially in this economy, with so much job insecurity and property price instability?"

Has a vacuum effect happened before?

Owen said a similar phenomenon happened in 2000 when a $7,000 grant for first-home owners was unveiled.

"Despite the first homeowner grant being in place since 2000, its uptake is concentrated up to November 2001. Following this, first-home buyer participation fell away between 2002 and 2004," she said.

The grant was temporarily boosted in the wake of the global financial crisis, which resulted in another brief surge in demand.

"However, in both of these instances, it is worth noting that any 'vacuum' effect here was likely compounded by a strong surge in dwelling values, which is when first-home buyer participation is typically stunted due to affordability constraints," she said.

Still, Owen said the HomeBuilder scheme could still create additional construction demand given that it targets new housing. However, she believes that the highly uncertain economic climate might ultimately impact the eventual demand the scheme creates.

"This is one of the reasons consensus is mounting around social housing being a more efficient use of government expenditure, because it guarantees the upgrade and building of homes through direct expenditure," she said.

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