Prime Minister Anthony Albanese has acknowledged that his government’s new five per cent deposit scheme for first-home buyers is likely to cause a "slight increase" in house prices, despite the policy being promoted as a means to improve housing affordability. The scheme, which allows new buyers to enter the market with a deposit as low as five per cent—while the government acts as guarantor for the remainder of the standard 20 per cent deposit to bypass lenders mortgage insurance—was introduced with the intention of helping younger Australians get a foothold on the property ladder. However, experts have warned that in a housing market already starved of supply, the resulting boost in demand will further fuel soaring prices, essentially disadvantaging the very buyers it seeks to assist.

The scheme comes at a challenging time for the housing sector. The Reserve Bank of Australia (RBA) recently held the official interest rate steady at 3.60 per cent, citing creeping inflation as a concern, which effectively dashes hopes among potential buyers for lower borrowing costs in the near term. RBA Governor Michele Bullock has highlighted persistent supply shortages, noting that while governments are attempting to increase building approvals, any meaningful impact on supply is at least two years away. The stark reality is that housing approvals, particularly for apartments—which are critical for affordable entry-level housing—have actually declined in recent months, with July and August witnessing drops of 8.2 per cent and another 6 per cent respectively. This signals a difficult road ahead for the government's ambitious promise to deliver 1.2 million new dwellings by 2029.

Financial experts and economists widely caution that demand-side interventions, such as the five per cent deposit scheme, tend to simply push prices higher rather than making homes more affordable. According to industry data and Reserve Bank research, such schemes largely benefit sellers rather than first-time buyers, as increased purchasing power bids up property values. The Productivity Commission has similarly noted that policy measures which subsidize demand without addressing supply constraints tend to leak benefits to home sellers through inflated prices. The Australian Greens have estimated that the scheme could add an additional $55 billion to property prices over the next six years, potentially plunging buyers into untenable debt.

The scheme also shifts significant financial risk onto taxpayers by effectively acting as a government-backed mortgage insurer. While lending institutions must technically adhere to responsible lending laws under the National Consumer Credit Protection Act and ensure loans are suitable, experts argue that a government guarantee may encourage lenders to approve riskier loans. This moral hazard reduces the price discipline that usually limits marginal lending, posing potential long-term risks if housing prices stall or fall. Homeowners with minimal equity and large mortgages could face severe financial stress in such scenarios, though the government guarantee would protect lenders rather than borrowers. Such risks are compounded by tight rental markets with vacancy rates at just 1.2 per cent nationally, which continue to drive up rents and attract investors benefiting from tax concessions like negative gearing.

In response, government officials, including Housing Minister Clare O'Neil, defend the scheme as a necessary step to provide immediate assistance to first-home buyers, while the government has committed funds towards building 100,000 new homes exclusively for this group and offering tax incentives aimed at stimulating supply. However, many experts argue that a comprehensive solution to housing affordability requires a stronger supply-side focus—expediting building approvals, easing planning restrictions, reforming negative gearing laws, and considering tax reforms such as replacing stamp duty with a land tax to encourage market fluidity. Build-to-rent models have also been suggested as viable ways to increase affordable housing options.

Ultimately, the scheme may prove politically popular and provide short-term headline grabbers, but its economic effectiveness in addressing Australia’s deep-rooted housing affordability crisis remains highly questionable. Without a significant increase in housing supply, the policy could exacerbate price inflation, undermine financial stability for vulnerable buyers, and place greater fiscal risk on taxpayers—all while failing to deliver on the promise of more accessible home ownership.

📌 Reference Map:

Source: Noah Wire Services