Page 1981 - Week 06 - Wednesday, 25 June 2008
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At the rate of depreciation that ACT Treasury assumes, a purchaser who buys under Labor’s scheme would build up negative equity in the first 12 years of a 25-year loan unless they are paying a substantial amount of the capital amount off their loan. Over the remainder of the loan they would be catching up on earlier accumulated losses. They will not get ahead financially unless they stay stuck in the loan for the full 25 years, and if they exit early they will take a loss.
Mr Ahmed, Executive Director, Policy Coordination and Development at ACT Treasury, confirmed that a house loan without a loan against land was seen as a risky proposition by the banks. When questioned in the estimates committee, he reported:
Throughout the development of the policy we consulted extensively with the financial institutions ... the financial institutions would expect a slightly higher level of deposit.
Mr Ahmed also confirmed that banks would refuse to lend to first home buyers who sought the usual 90 to 95 per cent finance. It is not hard to see why Treasury thinks the banks would want large deposits. The banks want any initial loss of equity to be a loss from the home buyer’s pocket and not a loss from the bank’s security.
Treasury provided an oral briefing for the opposition on the land rent scheme. We asked if any bank had confirmed that they would even be prepared to lend against the scheme. The response was, “Well, no. They will consider applications when they get them.” Subsequently, through questions on notice, the opposition has ascertained from Treasury that those few banks will expect participants to provide deposits of 20 per cent. That is not the banks’ number. It is the Treasury assumption that has been given to us. Treasury also assumes that the average borrower will be on an income of $50,000 and will have a deposit of $40,000. That is a high assumption. There would be very few people in the community on $50,000 a year who would be likely to be able to save $40,000.
Treasury concedes that few people will be able to afford to buy under the scheme. Let us remember that the scheme is demand driven, not capped. Treasury assume that only 120 blocks will be land rented per annum. Treasury modelling assumes that after five years only 20 land renters will graduate to full land ownership—20 people graduating to full ownership after five years. That is not a serious solution to a housing crisis that has thousands of Canberra renters in its grip. Treasury admitted in estimates that their modelling showed negative equity in the years immediately after purchase. Mr Ahmed said:
For a very brief period within the first year, there seems to be some suggestion they might go into negative equity. But certainly we do not see a household going into negative equity on an ongoing basis. The moment people purchase a house, there is that quick, initial depreciation that happens in the first year.
Treasury modelling makes very questionable assumptions about the outyears of a loan. They assume that construction costs will increase by 2.5 per cent per annum and that this will help prop up the price of a house. In picking this number they look to ABS statistics, which show that house prices have increased by 25 per cent over the past
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