Equity loans have been suggested as one way of helping first-home buyers get a foothold in the property market. This concept was put forward a few months ago by the Menzies Research Centre think tank.
Since the idea was floated it has attracted mostly praise as a possible solution to a difficult problem. On the other hand, there's a lurking suspicion that the scheme may be more about helping financial institutions get a bigger slice of Australia's huge residential property market.
Ignoring peripheral players such as real estate agents, solicitors and the State Government, the purchase of a home involves two parties: the borrower/buyer and the lender, the latter having the right to sell the house and recover their debt if the borrower breaches the loan conditions.
The equity investment concept introduces a third party: the investor, which would probably be a financial institution. The idea is that for financing, say, 30 per cent of the cost of the home the investor participates to the same extent (30 per cent) or more in the capital gain (or loss) made when the home is eventually sold.
As with all new schemes, there may be devil in the detail, but because there is no equity investment product being actively marketed at present, there is precious little detail.
Broadly, the investor would contribute 30 per cent of the cost of buying the home, including taxes and stamp duty, with the lender and the home buyer funding the difference. In effect, the home buyer needs a smaller deposit and will service a smaller loan than would be the case without the equity partner's input. For their input, the investor receives a proportion of the capital gain when the property is sold (or shares a proportion of the capital loss if that occurs.)
The question is: What is a fair share?
The concept designers started out looking at a 30 per cent share of capital gain going to the investor, but the thinking has moved to a 60 per cent share of gain to take into account the fact that the home buyer lives in the house and is not paying any rent to the equity partner. However, the investor would have to wear only 30 per cent of any capital loss.
The main designer of the scheme, Christopher Joye, says that the lower home entry price will make housing more affordable for first-home buyers and leave them with more disposable income once they move in, since the loan servicing costs are less than they would be if the equity partner did not exist and more had to be borrowed.
Then there is the question of control, or what is done with the home. Lenders don't care what the home buyer does with the house as long as their underlying security is not eroded. With the introduction of an equity partner, there is the question of whether the home buyer needs to ask the permission of the equity partner before undertaking any renovations or improvements.
Joye says that the householder will retain virtually all of the decision-making rights one finds in the contemporary mortgage market. The home buyer determines the timing of the sale and any changes to be made to the property. The home buyer would fund these extensions or renovations and, having done that, will want the benefit of them.
Joye says it is envisaged that households will be compensated for any renovations according to the appraised impact of the change on the value of the property, and that this would in turn be reflected in an increase in the occupier's relative rights to the gains achieved.
This assessment would be made by an independent expert who would be paid on a pro rata basis by both parties.
Given that almost everyone who moves into any home that isn't new embarks on some renovations, this is an important issue that needs to be resolved.
What if a home buyer is blamed for failed renovations that detract from capital gain? Would they have their share of any capital gain from a sale reduced?
