HomeStart grant - a risk not worth taking?

Auckland's pricey North Shore (Getty)
Auckland's pricey North Shore (Getty)

Financial ruin beckons for first-home buyers under the new HomeStart grant caps, an economist has warned.

The Government has raised the maximum buyers can borrow to buy a house in Auckland to $650,000, and raised the income cap to $85,000 for a single person and $130,000 for a couple.

But the amounts on offer - $10,000 for an existing home or $20,000 for a new build - haven't changed, and economist Shamubeel Eaqub says $650,000 is still 6.5 times an average Auckland couple's income, "an extraordinary amount of money".

"If house prices fall, it would mean financial ruin for a lot of these people," he told Paul Henry on Monday.

"But at the same time, they had to increase it because house prices have risen so much there was nothing available in the cap that was put in place, particularly for Auckland... Once you start the policy, you can't say that we're going to have a cap that has no houses in it."

Mr Eaqub, whose gut feeling is the bubble will burst in the next year, says most HomeStart grant recipients won't have big deposits, and a reverse in house prices will see them underwater.

"A 10 percent fall in house prices would mean you've lost everything you have in this, but the mortgage doesn't go away."

Many of them will also be raiding their KiwiSaver to pay for the deposit, and hoping interest rates stay at historic lows. Mr Eaqub says with prices where they are it's not a wise move to empty the piggy bank since there's a good chance a $650,000 house won't be worth that much for long.

"Make sure you still have savings for retirement - KiwiSaver's really meant to be for retirement. And make sure you can repay the interest if interest rates go up."

Housing Minister Nick Smith says the HomeStart grant is one of "multiple" tools the Government is using to keep Auckland prices in check. Mr Eaqub disagrees that by encouraging people to buy, it's helping keep prices artificially high.

"You don't want to be throwing any more fuel into the market. But these guys are playing at the bottom of the market - it's not going to be a huge problem."

Auckland Council's answer to the crisis is the Unitary Plan - freeing up land and allowing landowners to build more high-density housing. But it's been revealed the independent panel, which spent two years working on the final version of the plan, did economic modelling which showed only a single house built in the existing city limits would be under $500,000.

Only 15 percent of them are likely to cost less than $800,000, and 2 percent below $600,000.

Despite these flaws, Mr Eaqub is a big fan of the plan.

"If councillors don't vote for it, write down the names of people who have not voted for it and vote against them, because this is critical. This is the first plan that's actually planned for Auckland's growth. It's brilliant, but it's going to take lots and lots of time."

But if it's going to work, it needs Government oversight to make sure we don't repeat the mistakes of the 1990s.

 "The building industry doesn't have the capacity. We saw what happened in the early '90s when we built fast - the leaky homes saga started. Our industry is not capable, so we really need to invest in things like long-term building contracts, so the Government has to play a big part."

Compared to residents' incomes, Auckland is more expensive than New York, Tokyo and San Francisco, says Mr Eaqub.

Dr Smith doesn't expect house prices in Auckland to become affordable until 2020, despite his efforts. 

Labour leader Andrew Little says changes to KiwiSaver HomeStart loans are just tinkering.

The scheme started on April 1, 2015, and provides grants of up to $10,000 towards the deposit for the purchase of an existing home and grants of up to $20,000 for a newly built home.

Housing Minister Nick Smith has announced that from Monday the income caps will increase from $80,000 to $85,000 for a single person, and from $120,000 to $130,000 for a couple.

The house price cap in Auckland is now $600,000 for an existing home and $650,000 for a new home, with $500,000 existing/$550,000 new applying in Wellington, Christchurch, Hamilton, Tauranga, Queenstown and Nelson-Tasman and $400,000 existing/$450,000 new to the other areas of New Zealand.

Mr Little says the HomeStart scheme has been such a failure that even in a time of desperate housing need, $10 million in subsidies were not taken up last year.

"For those in Auckland, the Government's failure to address the housing crisis means houses are simply not being built for $650,000," he said.

Dr Smith said a couple on an average income each of $60,000 could potentially afford a $650,000 home, by withdrawing $45,000 from five years invested in KiwiSaver, getting a $20,000 HomeStart grant for buying a new build, and being eligible for a Welcome Home Loan with a 10 percent deposit, he said.

Newshub. / NZN