What's even better than the first home owner's grant ?
Free money! Who doesn’t like it? It always feels like it’s that little bit better if we can get it off the government too… They tax us enough as it is, why shouldn’t we get some of it back, right?
At first glance, it seems pretty generous. In WA and NSW it’s $10,000, Victoria it’s $10,000 in the city and $20,000 in regional areas, QLD & SA are both $15,000, TAS is $20,000 and the NT is the most generous of all, $26,000 with no restrictions.
I’m sure that there’s more than a few parents out there showing some of these numbers to their kids. Get in to the property market they’ll be saying. You can’t go wrong with property, and this is free money! There’s probably even a few parents out there who’ll be fronting up for some of the deposit.
So what’s the problem with taking a little back if it’s being offered? To answer this, we need to remember that nothing is really ever free, and what makes a property’s value increase over time.
I want you to imagine two identical blocks of land sitting side by side. Both blocks are worth $100,000. On one block the owner parks this classic rickshaw. While the sentimental value is immeasurable, in dollars it’s worth about a $1,000. Now this block is worth $101,000.
On the other block the owner parks this BMW M4. Their pride and joy set them back $150,000. Now, their block is worth $$250,000. Pretty easy to see which one is the better block of land now right? Maybe not so much when you think about the values in 20 years from now.
Let’s say both of these owners could borrow all of the money for the land and the car at 4%. It cost owner 1 $612 a month to pay theirs off over 20 years. It costs owner 2 $1515 a month.
Let’s say both the blocks of land increase by 7% each year. The buildings depreciate by 5%. Now consider how this plays out over time.
The total value for owner 1 for their block and a rickshaw is $362,030. Total value for owner two is $418,256. It’s only cost owner 1 $146,880 to pay their debt of over 20 years though, compared to owner 2’s cost of $363,300 to pay off theirs. Owner two has made a net gain of $54,656, owner one has made a net gain of $215,150. The rickshaw owner is $160,494 better off, compared to their BMW loving friend. Let’s say these cars were in fact houses, the rickshaw is an older style 3 bedder. Liveable, but nothing flash. The BMW is the 5 bedroom 6 bathroom McMansion that the builder convinced the owner they needed.
And this right here is the problem with the first home owners grant. By stipulating that you can only receive it for a new building, and in most cases under a certain cost, the grant ensures that first home buyers are making a purchase without thinking about their long term investment risk.
While these numbers paint a pretty bleak picture, there are factors that exacerbate this even more. By having a limit on the cost of the property what we actually see quite often is first home owners grants being paid in areas where there’s a lot of land and little demand. Often, it’s just too expensive to buy a block in an established, high demand suburb and build a new home for under the grants limit.
So lets say owner 1 in fact buys a home for $750,00 here in Victoria. With stamp duty, transfer fees and registering the mortgage their cost is $792,038. They’ve bought well in a good suburb and there’s 8% growth over the next 20 years. The house is pretty old and for the sake of our calculations let's say it’s worth $100,000. To pay off their loan over $20 years it costs them $4,800 per month.
Owner 2 buys a block of land for $400,000 and builds for $350,000. They get the first home owners grant of $10,000 so their cost is $782,038. Their suburb isn’t in as in demand and it gets 5% growth. Their loan costs $4,739 per month to pay off in the same 20 year period.
Both of these first home buyers have received some assistance from their parents equity and have financed the full amount of the purchase and costs. Let’s presume the value of the buildings depreciate by 3% every year.
Look at how these scenarios play out over time. Owner two’s investment decision, first home owners grant included, net’s them a $70,000 gain over 20 years. Owner one, 1.7 million dollars.
They start in the same place, owner two has the fancier house and probably feels pretty good about themselves for the first few years. Owner one has to deal with not having a new and shiny house now, they have however set the course for a future with many more financial opportunities.
If you’re a first home buyer (or convincing a loved one they should be) then it’s best to realise that
A new home is not generally not the best option for financial success in the future
The price restrictions on the grants most likely lead to land being bought in lower demand areas
A first home, in most cases, is not a forever home.
Buying smart for your first home can be the difference between financial success and financial heartache in the future. A ten thousand dollar government handout isn’t going to change that.
The first home owners grant isn’t really about giving ‘a leg up’. As populations expand people need more places to live. Home owners grants and stamp duty concessions the government's way of making sure there are more properties being built. They have zero care about the investment potential of a property.
So, what’s even better than the first home owners grant? In most cases it’s leaving it to become someone else’s mistake.