First home buyer scheme found to be fuelling price increases at lower end of market, Cotality suggests

The Paradox of Low-Deposit Schemes: Helping Buyers or Hiking Prices?

For many aspiring homeowners, the dream of owning a home often hits a wall: the deposit. Government initiatives, such as the Australian Government 5% Deposit Scheme (formerly known as the Home Guarantee Scheme), aim to dismantle this barrier by allowing eligible buyers to enter the market with significantly lower upfront costs and without the burden of lenders’ mortgage insurance (LMI).

Although, recent data suggests a complex side effect. Research from property analytics firm Cotality indicates that these schemes may be fueling a price surge at the lower finish of the housing market. When demand is artificially boosted through lower entry requirements without a corresponding increase in housing supply, the result is often a price hike that erodes the highly affordability the scheme intended to create.

This trend is most visible in Sydney, where a stark divergence has emerged: homes below the price cap rose 4.1 per cent, although higher-priced properties actually fell by 1.1 per cent. This creates a “growth gap” that makes it increasingly difficult for the next wave of first-home buyers to get their foot in the door.

The Danger Zone: Negative Equity and the Low-Equity Trap

While a 5 per cent deposit lowers the initial savings hurdle, it fundamentally changes the risk profile of the loan. Borrowing 95 per cent of a property’s value leaves a homeowner with a very thin equity buffer. In a stable or rising market, this is manageable; however, in a volatile environment, it opens the door to negative equity.

Negative equity occurs when a borrower owes more to the lender than the current market value of the home. For those who entered the market with a minimal deposit, even a slight dip in property prices can wipe out their equity entirely, leaving them trapped in a loan that exceeds the asset’s value.

As inflation concerns persist and global uncertainty weighs on the economy, the risk for low-deposit borrowers increases. Without a substantial equity cushion, these buyers are far more exposed to the pressures of higher repayments and potential market downturns.

A Fragmented Market: Residential vs. Commercial Trends

The property landscape is currently performing in silos. While residential property continues to be supported by a chronic shortage of housing, other sectors are reacting differently to economic pressures.

Industrial property, particularly warehouses, remains a powerhouse driven by the relentless growth of e-commerce and infrastructure demand. Conversely, the office and retail sectors are struggling. Higher interest rates, shifting work-from-home habits, and changing shopping behaviors have pushed these sectors below neutral confidence levels.

Even within the residential sector, confidence is cooling. The Australian Property Institute (API) reported a dip in its key index from 7.1 to 6.1, signaling a broad slowdown across various states. This suggests that while the “bottom end” of the market is being pushed up by first-home buyer activity, the broader market is becoming more cautious.

The Interest Rate Weight: The New Market Driver

For several years, constrained supply was the dominant force driving Australian property prices. However, the narrative has shifted. Recent cash rate increases by the Reserve Bank of Australia (RBA) have become the primary drag on market confidence.

The RBA has acknowledged that expanded guarantee schemes can increase the borrowing capacity of first-home buyers and bring forward purchases, which puts upward pressure on prices in the short term. While Treasury suggests that supply will eventually respond to this demand to dampen the price effect, that relief is a medium-term prospect, not an immediate fix.

For the modern buyer, the challenge is no longer just saving for a deposit—it is navigating a high-interest-rate environment where borrowing capacity is squeezed and cost-of-living pressures are mounting.

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