Source: ABC News
In short:
Since the Home Guarantee Scheme was expanded in October price growth has been significantly stronger for properties below the government's price caps.
Cotality warns the scheme works against the goal of improving housing affordability by boosting demand without addressing supply.
A housing minister spokesperson says the scheme helps "hundreds of thousands of first home buyers" while the government fixes a "supply problem generations in the making".
New research from property analytics firm Cotality appears to show that a federal government scheme intended to help first home buyers is fuelling a price surge at the lower end of the housing market, raising concerns it maybe worsening entry level affordability.
Since the Home Guarantee Scheme was expanded in October last year,price growth has been significantly stronger for properties below the government's price caps.
New Cotality data shows eligible homes rose 6.7 per cent in the first six months after the changes, nearly double the 3.6 per cent increase recorded for higher?priced properties.
First home buyers moved quickly to enter the market after the expanded scheme began on October 1 last year, taking advantage of the removal of limits on borrower numbers.
That has allowed many more first home buyers to purchase with a deposit as low as 5 per cent and a government guarantee negating the need for expensive lenders' mortgage insurance.
Cotality research director Tim Lawless said the expanded scheme likely temporarily lifted home ownership rates, but warned it worked against the goal of improving housing affordability by boosting demand without addressing supply.
"If they're looking to achieve higher levels of home ownership then yes,they'd probably achieve that temporarily," he said.
But if they're looking to address housing affordability then this scheme works the opposite — it actually pushes prices higher and doesn't do anything for affordability.
"A first home buyer buying, say, a year later in October this year, is going to find it much harder to get their foot in the door.
"It really just seems to be putting a band aid over the symptoms of housing affordability, while over the medium to longer term making it worse by driving prices higher at the most affordable end of the market."
The pattern is evident across almost the entire country except regional Western Australia and the Northern Territory.
The trend is most pronounced in Sydney where homes below the price cap have risen 4.1 per cent over the past six months and higher-priced properties have fallen by 1.1 per cent, creating the largest growth gap in the country.
The report acknowledged that the stronger growth at lower price points also reflected affordability pressures and investor activity.
Higher home prices and higher interest rates were pushing buyers toward cheaper homes, while investors — which comprised 40 per cent of mortgage demand in the fourth quarter — were also adding competition in the lower?priced segment.
A spokesperson for Housing Minister Clare O'Neil said the government made no apologies for "helping hundreds of thousands of first home buyers while we fix a supply problem generations in the making".
"Without this scheme, many first home buyers wouldn't be able to enter the market at all."
"Cotality reporting is telling us that entry level prices have been rising faster than the rest of the market for several years," the spokesperson said.
While the 5 per cent deposit scheme lowers the up-front savings hurdle, Mr Lawless said that serviceability was increasingly the biggest barrier for first home buyers, particularly amid heightened inflation concerns linked to the conflict in the Middle East.
Buying with a 5 per cent deposit means taking on a loan for 95 per cent of the purchase price, leaving borrowers far more exposed to higher repayments when prices and interest rates rise.
"It doesn't take much for a recent buyer to get into a negative equity situation if they've got a small deposit," Mr Lawless said.
"It certainly does put them in a tighter situation, not having the benefit of an equity buffer to protect them from a housing downturn."
Negative equity is a situation in which a borrower owes more than the current value of their home.
The activity spurred by the First Home Guarantee is occurring against a back drop of cooling property market confidence in early 2026.
A key index from the Australian Property Institute (API) fell to 6.1 from 7.1last quarter, showing a broad slowdown across all states and property types.
Recent hikes by the Reserve Bank have become the biggest concern for the market, outweighing earlier issues like housing shortages.
While confidence is falling, the index, which surveyed 247 property professionals between March 12 and March 30, 2026, was still above neutral, meaning the market was slowing rather than falling.
Australian Property Institute chief economist Sherman Chan said confidence had fallen swiftly as inflation worries, global uncertainty and the likelihood of further interest rate rises weighed on sentiment.
"The property story has changed quickly in 2026," Dr Chan said.
"For the past several years, constrained supply has been the dominant force in the market.
"Following the February and March cash rate increases the interest rate outlook has now become the biggest drag on confidence across the property sector."
According to Dr Chan, different parts of the market are performing very differently.
She said industrial property — like warehouses — are now the strongest sector, helped by e-commerce and infrastructure demand.
Office and retail sectors are struggling, with both falling below neutral as higher interest rates, weaker business confidence, and changing work and shopping habits weigh on demand.
Residential property recorded the sharpest single quarter fall of any asset class, dropping from 7.2 in the first quarter to 6.2 in the second quarter, but was still holding up due to a shortage of housing.
Sydney and Melbourne home prices have edged lower over the first quarter of the year as buyers grow more cautious in the face of interest rate uncertainty, cost?of?living pressures and higher fuel prices.
However, despite these headwinds, price growth is continuing in most other markets.
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