In the 2014–15 Budget, the Government announced the end of the First Home Saver’s Account (FHSA) scheme, ‘due to lower than forecast take-up rates’, for a saving of $134.3 million over five years. This Flagpost provides some background on First Home Saver Accounts and the changes announced in the Budget.
First Home Saver Accounts were first announced by Labor during the 2007 election campaign, as a way to ‘help aspiring first home buyers save a larger deposit’, addressing ‘one of the greatest obstacles to buying a first home’. While State and Territory governments offered grants to first home buyers, FHSAs combined contributions by government (through matching funding for savings) with tax concessions for savers, both intended to assist first home buyers. A consultation paper was released in February 2008 and legislation introduced in May 2008.
When introduced, the accounts were available to individuals saving for a first home, with a government co-contribution of 17 per cent on the first $5,000 of savings, and interest earnings taxed at a flat rate of 15 per cent (rather than the individual’s marginal rate). An indexed cap of $75,000 applied to account balances. To access the funds, an individual had to make personal contributions of at least $1,000 in four different financial years. Amendments introduced in 2011 meant that eligible first home owners who purchased a home before meeting the minimum qualifying period could subsequently use their FHSA funds to pay their mortgage. Previously there was a requirement that if not used when first buying a home, the funds were to be transferred to superannuation.
The number of accounts and quantity of savings grew much more slowly than expected. At March 2014 only around 48 thousand accounts were open (with a total balance of $537 million), well below the 730,000 forecast for 2012 when the scheme first opened. (The Government expected a total balance of $6.5 billion after four years.) There are a number of factors that may have contributed to the low take-up, including the small number of providers, the four year requirement, and low consumer awareness.
Only a small number of providers ever offered the accounts. When the schemes initially opened in 2008, only two of the four major banks (Commonwealth Bank and ANZ) took part, and by March 2014 none of the major four offered them: the Commonwealth Bank and ANZ kept existing accounts but both stopped offering new accounts. At March 2014, of seventeen FHSA account providers, seven had stopped offering new accounts. A number of initial submissions on the 2008 consultation paper had identified concerns over the cost and regulatory burden, including the National Institute of Accountants and the Australian Bankers’ Association. A submission by the Association of Building Societies and Credit Unions (ABACUS) on the 2011 reforms noted the logistical challenges involved in providing the accounts, including the IT systems and ongoing reporting required.
Industry bodies also frequently noted the four year requirement as lowering demand, although the initial press release announcing the policy stated that ‘it typically takes first homebuyers an average of five years to save an adequate home deposit’. In 2011 ANZ suggested allowing consumers to forgo any tax and co-contribution benefits if they needed to withdraw funds early, and the Australian Bankers’ Association, AMP and ABACUS all argued the four year requirement was too restrictive. In a small survey by mortgage broker Loan Market, a number of respondents saw the time and withdrawal requirements as restrictive. However a shorter time requirement might have simply provided additional benefits to those who had already decided to buy a first home, without encouraging behaviour changes or improving first home buyer access.
A final factor is that consumers may simply not have been aware of the accounts. Forty-six per cent of respondents to the Loan Market survey had not heard of the accounts, suggesting that poor awareness may have contributed to low take-up.
The Government’s Budget changes mean that new accounts opened after Budget night will not be eligible for the government co-contribution; existing account holders will receive it only for the 2013-14 financial year. Tax and social security concessions will remain for one additional year, until 30 June 2015, and there will be no restrictions on withdrawals after 1 July 2015. The FHSA scheme closure will reduce Commonwealth Government support to first home buyers; they may not however have been the most effective policy. As Saul Eslake argued recently, an increase in demand when supply is inflexible likely contributes to higher prices. State and Territory governments continue to provide some grants and tax concessions to first home buyers. State grants have recently been retargeted towards buyers who are buying or constructing new homes (NSW, Queensland, Victoria, South Australia, ACT, NT and Tas). Western Australia continues to provide a small grant to buyers purchasing existing homes.