When markets opened on Monday, Australia’s five per cent home deposit scheme was found to have contributed to a 6.3% national rise in median house prices over the past year, according to an Australian Broadcasting Corporation analysis released today, with critics warning the policy exacerbates affordability pressures by stimulating demand without increasing supply.
The Bottom Line
- The scheme, designed to assist first-home buyers, has coincided with a 12.4% YoY increase in mortgage lending to owner-occupiers, per Reserve Bank of Australia data.
- National housing supply remains constrained, with new dwelling approvals down 8.1% YoY in Q1 2026, according to ABS.
- Major banks including Commonwealth Bank (ASX: CBA) and Westpac (ASX: WBC) have seen home loan book growth of 9.2% and 7.8% respectively, boosting interest income.
How the 5% Deposit Scheme Distorts Price Signals in a Tight Market
The policy, which allows eligible buyers to purchase property with just a 5% deposit and avoids lenders mortgage insurance through a government guarantee, has been credited with increasing first-home buyer participation by 18.7% since its expansion in mid-2025. However, data from CoreLogic shows that in Sydney and Melbourne—the two largest markets—median prices rose 7.1% and 5.9% respectively over the same period, outpacing wage growth of 3.2%. This imbalance suggests the scheme is amplifying demand-side pressure in a market where new housing completions fell to 156,000 units in 2025, the lowest level since 2012, per HIA.
Here is the math: with approximately 1.2 million households eligible for the scheme and an average loan size of AUD 650,000, the potential guarantee exposure exceeds AUD 39 billion. While the government caps its liability at AUD 10 billion through a tiered fee structure, the effective stimulation of demand has coincided with a 4.1% quarterly increase in national rents, per SQM Research, indicating flow-on effects to rental markets as investors anticipate higher yields.
Bank Balance Sheets Benefit, But Systemic Risks Linger
Major lenders have reported strong home loan growth, directly tied to expanded eligibility under the scheme. Commonwealth Bank (ASX: CBA) reported a 9.2% increase in owner-occupier lending in its Q1 2026 results, contributing to a 6% rise in net interest income. Westpac (ASX: WBC) disclosed similar trends, with housing loan growth of 7.8% and a margin expansion of 12 basis points. ANZ (ASX: ANZ) and NAB (ASX: NAB) also reported mid-single-digit home loan book growth, reinforcing the sector’s reliance on residential mortgages for earnings stability.
“While the scheme supports access, it does not address the structural shortage of housing. We’re seeing price acceleration in constrained markets without a corresponding increase in supply, which risks entrenching inequality.”
But the balance sheet tells a different story: household debt-to-income ratio rose to 188.4% in Q4 2025, the highest since 2017, per RBA. With the cash rate held at 4.35% and inflation at 3.6%, the Reserve Bank has signaled no imminent cuts, leaving borrowers vulnerable to future rate hikes. A 50-basis-point increase would raise monthly repayments on a AUD 650,000 loan by approximately AUD 200, stressing highly leveraged borrowers who entered the market with minimal equity.
Builder Margins Squeeze Amid Rising Costs and Stalled Supply
On the supply side, residential construction faces headwinds. Building approvals fell 8.1% YoY in Q1 2026, with detached house starts down 10.3%, per ABS. Major builders like Stockland (ASX: SGP) and Mirvac (ASX: MVG) have cited rising labor and material costs—up 5.7% and 4.9% respectively YoY—as constraints on new commencements. Stockland’s Q1 2026 earnings showed a 14% decline in residential EBITDA, despite stable presales, as input costs outpaced pricing power.
This dynamic creates a classic stagflationary signal in housing: strong demand fueled by policy, weak supply due to cost and regulatory delays and rising prices without broad-based wage support. The National Housing Finance and Investment Corporation (NHFIC) estimates a cumulative shortfall of 200,000 homes by 2028 under current trends, a gap the deposit scheme does nothing to close.
Investor Sentiment Shifts Toward Build-to-Rent and Affordable Housing
In response, institutional capital is gradually pivoting. Major superannuation funds, including AustralianSuper and Hostplus, have increased allocations to build-to-rent (BTR) and affordable housing projects, which offer long-term, inflation-linked returns. AustralianSuper’s direct property portfolio now includes over AUD 4 billion in BTR assets, with a target yield of 5.5–6.5% net of fees. These investments are structured to bypass the volatility of owner-occupier lending while addressing systemic undersupply.
“We’re not betting on price spikes from demand subsidies. We’re investing in physical assets that generate rent rolls and qualify for government co-investment schemes—Here’s where the real, sustainable yield is.”
Meanwhile, shares in residential developers have underperformed. The S&P/ASX 200 Home Construction Sub-Index is down 4.2% YTD, underperforming the broader index by 6.8 points, as investors price in margin pressure and delivery delays. In contrast, REITs with exposure to social and affordable housing, such as Community Housing Limited (ASX: CHL), have seen total returns of 8.1% YTD, reflecting a shift in capital toward assets with government backing and stable cash flows.
The Bottom Line: Policy Intent vs. Market Outcome
The five per cent deposit scheme has successfully increased access for first-time buyers, with over 110,000 guarantees issued since inception. However, its impact on prices—particularly in supply-constrained cities—suggests it functions more as a demand stimulus than a solution to affordability. Without parallel investment in housing supply, zoning reform, and construction productivity, the scheme risks amplifying the very inequality it aims to reduce.
For lenders, the policy has delivered short-term earnings support through loan book growth. For builders, it has done little to offset rising input costs or approval delays. For investors, the signal is clear: sustainable returns lie not in leveraged owner-occupier lending, but in long-term, socially aligned assets with predictable cash flows and public-private risk sharing.
*Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute financial advice.*
