Government attempts to “fix” the housing market could be contributing to the very affordability crisis it was trying to solve.
Property market analysts have warned that generous first-home buyer support could be partly fuelling the high inflation that has prompted the RBA to hike interest rates, making housing pricier.
And scrapping these government incentives may go some way in slowing a recent surge in inflation, a prominent economist claims.
The Australian Bureau of Statistics this week revealed inflation rose to 4.6 per cent over the year to March, up from 3.7 per cent in the year to February, with housing costs rising 6.5 per cent.
The high inflation reading – well above the Reserve Bank’s target range of 2-3 per cent – has the mortgage industry warning more interest rate hikes could be coming.
The guarantee scheme expansion was a key promise of the Albanese campaign for re-election last year. Picture: NewsWire / Martin Ollman
Some industry figures are even warning the Reserve Bank may have a strong case to announce a double rate hike of 0.5 per cent at its upcoming monetary policy meeting next week.
Inflation has been sticky for some time and housing has been a key contributor.
Housing costs were the biggest inflation driver behind transport and clothing in the March CPI reading, but had been the biggest driver of inflation prior to the Iran War and resulting global oil crisis.
Economists told The Daily Telegraph that the Australian Government First Home Guarantee has been a factor in the high housing inflation – albeit indirectly through pressure on building costs at a time of sluggish construction.
PRD chief economist Diaswati Mardiasmo said the policy, which allows eligible buyers to use deposits as low as 5 per cent without needing pricey lender’s mortgage insurance, was inflationary.
RBA governor Michele Bullock is widely expected to announce another rate hike next week.
“The FHB scheme has definitely pushed up the prices in the lower, more affordable end of the market, making it more expensive and growing at a faster rate than its natural pace,” she said.
Dr Mardiasmo noted that the relationship between the scheme and inflation was complex, and difficult to measure, but there were signs it had an impacted general spending levels.
“The policy itself is a catch- 22,” Dr Mardiasmo said.
“By design and purpose of increasing the number of first-home buyers in the market, it succeeded. But by policy consequence and the aftermath, it is the opposite – it inflated the market and increased prices.
“All of which contributes to the inflation rate overall, which is a key measure that the RBA looks at when it comes to the cash rate decision.”
Dr Mardiasmo pointed to lending figures that showed loans to first-home buyers had soared 10 per cent since the government expanded the guarantee scheme in October – as had first-home buyer debt.
Debt levels before and after the October 2025 expansion of the scheme.
The average first-home buyer loan was $543,000 in the December quarter of 2024, before the scheme expansion, and was $607,000 in December 2025, shortly after the October changes were introduced.
“This massive spike is … unusual for the market, signifying increasing competition and more demand in the market, which of course increases prices,” Dr Mardiasmo said.
There was a chance that scrapping the scheme could go some way in slowing inflation, Dr Mardiasmo said, noting this was unlikely to happen as removing it would be politically untenable for government.
“There is also an argument that too much government intervention, through fiscal policy like schemes, can have an unwanted (result) which in this case is evident.”
There has been a surge in first-home buyers purchasing with small deposits.
Finder.com.au mortgage expert Richard Whitten said the scheme had flaws.
“The (scheme) is, like most government housing affordability initiatives, a demand-side subsidy,” Mr Whitten said.
“It boosts a buyer’s purchasing power by removing the cost of lenders’ mortgage insurance.
“This means some buyers can borrow a little more, and you can argue it’s inflationary for that reason.”
He added that the scheme may have boosted first-home ownership rates in the short-term, but with a catch.
“The scheme essentially makes buying homes a little cheaper for low deposit buyers today, while doing nothing to make housing more affordable in the longer term,” Mr Whitten said.
PRD chief economist Dr Diaswati Mardiasmo said the first-home buyer stimulus was inflationary.
Ray White chief economist Nerida Conisbee said the guarantee scheme could be putting pressure on building costs, which are directly measured by CPI.
“Housing is a major driver of CPI but house prices themselves are not included – instead, the ABS captures housing costs through rents and the cost of building new homes.
“At the moment, both are under pressure. Higher interest rates have reduced investor activity, tightening rental supply and pushing rents higher, while construction costs remain elevated.
“Policies like the First Home Guarantee can also add to this.
“Measures that boost demand – whether through lower deposit schemes or other incentives – tend to be reflected in higher prices or rents when supply can’t respond quickly.
“That can feed into CPI and strengthen the case for higher interest rates, which then loops back into the housing market by further constraining supply, particularly on the rental side.”
Fuel cost rises were one of the biggest inflation drivers in the March CPI. Picture: Morgan Hancock/Getty Images
Canstar insights director Sally Tindall said it was worth noting that interest rate hikes were moderating growth in property prices and any impact from the first-home guarantee scheme was indirect.
“The basket of prices collected by the ABS in the housing category includes the cost of utilities, rents, council fees and new dwelling costs and repairs and maintenance. Purchase of established dwellings and mortgages are not included in this group.”
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