First-home buyer scheme is a ‘cruel’ illusion, say economists
Cecile Lefort
Markets reporter
Oct 7, 2025 – 3.26pm
The government’s expanded first-home buyer scheme has been slammed by economists, who say it’s likely to increase property prices in an already overheated market while failing to address the underlying housing shortage.
The new policy, which allows aspiring first-home buyers to purchase a house with a deposit of just 5 per cent, instead of 20 per cent, without taking out lenders’ mortgage insurance, has already triggered a market frenzy in its first week.
“This is yet another cruel, cynical policy that will only have first home buyers competing against each other for the limited supply of housing available. It mainly benefits existing home owners,” said David Bassanese, chief economist at Betashares.
The view is echoed by Prashant Newnaha, a senior rates strategist at TD Securities.
“It’s a silly policy. It’s likely to drive house prices up. There is no free lunch.”
Even though the scheme is anticipated to lift house prices by up to 7 per cent this year, it will not boost the overall home ownership rate, according to The Australian Financial Review’s latest quarterly survey of economists, because it targets such a tiny pocket of the $11.6 billion local property market.
“The policy will be most effective if combined with a sharp uplift in dwelling completions. In the absence of this, it will mainly impact prices rather than home ownership levels,” said David Robertson, chief economist at Bendigo Bank.
Wealth accumulation
Home ownership in Australia is declining, especially for young people, as housing affordability worsens. This is largely because house prices are rising significantly faster than incomes.
Over three-quarters of Australians surveyed by pollsters Gallup were dissatisfied with the availability of affordable housing in 2024, compared to a median of 50 per cent in the Organisation for Economic Co-operation and Development.
“I would be far happier to see public funds and resources directed at subsidising supply improvements rather than demand enhancements,” said Tim Toohey, head of macro and strategy at Yarra Capital.
Lowering construction costs and cutting red tape for developers would help tackle the historic housing shortage, he said.
However, a big problem is the lack of political will to make these changes.
“The reason our housing affordability problem hasn’t been solved, and won’t be solved, is because our politicians all know that a very large majority of voters don’t want it to be solved,” said Saul Eslake, a former Bank of America Merrill Lynch chief economist.
He estimates there are fewer than 1 million aspiring first-time buyers compared to 12 million people who already own at least one property and want prices to climb.
“Even the dumbest of our politicians can do that math,” said the independent economist.
He added that “the problem is that, over the last 30 years, Australians have come to regard housing not as something that meets basic human needs like shelter, but rather, as a vehicle for accumulating wealth”.
Bank tests
Even if the increased demand from first home buyers eventually encourages more building, a fundamental problem remains: a crippled supply chain.
“We are missing our annual construction targets by at least 60,000 and productivity in housing is low with the time taken to build a home increasing by around 60 per cent just in the last 10 years,” said Diana Mousina, deputy chief economist at AMP. “More supply is proving hard to achieve.”
She also doubts the home ownership rate will improve. “The scheme benefits only a small group of people who are lucky enough to get in, but then it just leads to higher prices, crowding out renters or people living at home,” she noted.
Another hurdle for the scheme is that, despite the government’s help, many Australians still may not have enough income to borrow from banks.
“Many households in the key first home buyers demographic – 25- to 34-year-olds – would struggle with loan serviceability tests even if they could borrow with a smaller deposit,” said Luci Ellis, chief economist at Westpac.
This is because mortgage rates are still too high for many borrowers, despite the Reserve Bank’s easing campaign and a marked slowdown in inflation.
“While rate cuts and rising real income will improve borrowing capacity, it will take some years to return to 2019 levels,” said Jo Masters, chief economist at Barrenjoey.
