Government rejects ERA’s Keystart privatisation plan

28/07/2014 - 12:34
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UPDATE: The state government says it will not consider privatising low-deposit home loan scheme Keystart, despite the recommendation to do so by the Economic Regulation Authority.

UPDATE: The state government says it will not consider privatising low-deposit home loan scheme Keystart, despite the recommendation to do so by the Economic Regulation Authority.

The ERA's final report on its inquiry into microeconomic reform was released today, with the watchdog backing off from its position that Keystart should be abolished, saying instead it could be privatised to reduce the government’s risk of financial losses.

But Finance Minister Dean Nalder announced later this afternoon that the government would not consider the sale of Keystart.

"Keysart will not be divested but the government will look at smarter ways to manage the balance sheet without affecting the delivery of this vital service," Mr Nalder said.

"I have asked the Department of Finance to work across government to examine opportunities to improve the efficiency and performance of the Western Australian economy."

The ERA's draft report received 19 submissions opposing the recommendation to abolish Keystart, with the majority of respondents disputing that Keystart posed a financial risk to the state government, maintaining that the scheme was essential to assist people to transition from public housing into their own homes.  

Respondents to the draft report comprised lobby and representative groups, housing and land developers and local government associations.

The ERA said Keystart was not achieving its objecting of increasing the rate of home ownership in Western Australia, due to supply constraints in the state's housing market.

“It is therefore likely that when a Keystart client is successful making a purchase, another buyer is unsuccessful,” the report said.

“In addition, by adding to demand in a market with constrained supply, Keystart may be inadvertently increasing housing prices.”

The ERA said there was no compelling reason why Keystart should remain a government entity, as it could be replicated in the private sector.

“Accordingly, the ERA recommends that the government explore options for the divestment of Keystart,” the report said.

The scheme is designed to help low-income earners buy a home when they are unable to secure finance from the private sector.

Since its inception in 1989, Keystart has provided more than 80,000 loans, and its loan book as of October 16 last year was 16,000 loans, totalling $3.5 billion.

But the ERA said Keystart clients were "inherently riskier" than clients serviced by the private sector, because they are only required to put up a deposit of 2 per cent, compared with a 5 per cent deposit requirement for most private sector lenders.

Keystart borrowers are also not required to take out lenders mortgage insurance, increasing the risk for government, the ERA said.

Master Builders Association WA executive director Michael McLean told Business News that it was good the ERA had moved from its original position, but the association maintained that privatisation would not be helpful.

"If it's not broken, why fix it?," Mr McLean said. "Keystart is an established model, they're operating in a space that the private sector don't operate in and that's really why they are in that space.

"It's like public housing and rentals that the Department of Housing provide, it's a space that the private sector find difficult to enter."

Mr McLean said the risk factor was negligible for Keystart, considering the checks and balances and additional interest rates imposed on Keystart borrowers.

"When it comes to providing finance for entry-level housing for those that don't qualify for the major lenders, it's great that the government have developed criteria to fulfil that space," he said.

"Keystart operates in a niche market, and there is an element of the community that requires the support of Keystart.

"Privatising it isn't going to attract a ready market.

"If that were the case, there is nothing stopping the private sector competing with Keystart now."

Another issue raised in the draft report by the ERA was that the Housing Authority’s development activities posed a significant risk to the government, and could lead to significant financial losses.

In its update today, the ERA said further consultation with the authority has showed that it was achieving returns consistent with what would be expected in the private sector.

Despite this, the ERA said the Housing Authority’s current activities should be regarded as temporary given current market conditions, and an apparent lack of incentive for the private sector to provide an adequate supply of affordable homes.

The ERA also recommended a review into regulation of the sector, saying the supply affordable housing could be improved by addressing the regulatory burden on builders and developers, and direct investment in infrastructure may not be the most efficient way for the government to achieve its objectives.

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