With home prices had already having hit record highs, fears are growing that the federal government’s expanded first home buyer scheme, which came into effect this week, will push affordable properties further out of reach and potentially create a property bubble in the lower end of the market.

Meanwhile suburbs with house prices just below the new caps for the scheme could quickly become unaffordable for those they’re designed to help, as cashed-up buyers flood the property market while supply remains at historic lows, according to reports in The Australian newspaper and the Australian Financial Review.

And traditional first-home buyers – young couples trying to get their first place – will face unprecedented competition from wealthier purchasers who can now access the same benefits.

“It is really just like pouring fuel on a fire,” said Finch Financial founder and chief executive Julian Finch has told The Australian. “Housing prices are set to explode because this scheme doesn’t just create more buyers, it injects more money directly into a market already constrained by limited stock.”

What is the First Home Buyer Scheme?

The government’s First Homebuyer Guarantee allows first-home buyers to purchase a property with a smaller 5 per cent deposit, compared to the usual 20 per cent. The government acts as guarantor and contributes the remaining 15 per cent of a deposit, allowing buyers to avoid taking out costly lenders’ mortgage insurance.

While the scheme isn’t new, it was dramatically expanded from 1 October – three months earlier than its original start date of January 2026 – with several key changes:

No place limits: All Australian first home buyers who have saved a 5 per cent deposit can now apply, removing the previous yearly cap on participants. Treasury estimates 70,000 people will be eligible for the scheme in its first year – 20,000 more than the previous cap.

No income limits: First home buyers with higher incomes can now access the scheme. Previously, the scheme had income eligibility restrictions.

Higher property price caps: The caps have been raised significantly across all capital cities. In Sydney, the cap jumped from $900,000 to $1.5 million. Melbourne’s cap increased from $800,000 to $950,000, and Brisbane’s rose from $700,000 to $1 million. Canberra’s new cap is $1 million, Adelaide’s is $900,000, Perth’s is $850,000, Hobart’s is $700,000, and Darwin’s is $600,000.

Prime Minister Anthony Albanese said the scheme would help young people achieve home ownership sooner. “Bringing the start date of our 5 per cent deposit scheme will do just that, getting more Australians into their home quicker, while saving money along the way.”

Housing Minister Clare O’Neil said the scheme would make access to home ownership more equitable by “levelling the playing field,” particularly for younger people entering the property market.

Price Pressure and Competition

However, the removal of income caps has sparked significant concern that traditional first-home buyers will now face competition from much wealthier purchasers.

“They’re now competing with people who can earn an unlimited amount of money, and if they both want the same property there’s only one winner,” Mr Finch said. “It’s not going to help the people that it was designed to help in the first place.”

A potential bubble is forming in the lower end of the market, with increasing levels of property spruiking piling on demand, Ben Kingsley, chairman of the Property Investors Council and managing director of Empower Wealth, told the Australian.

“If you just look at the last quarter of data, investment lending is growing at three to four times greater than owner-occupied lending,” Mr Kingsley said.

Owl Home Loans mortgage broker Aidan Hartley said the expanded scheme created more competition, with first-time buyers with deeper pockets entering the market. “Their borrowing power is going to blow the lower borrowing power buyers out of the water,” Mr Hartley said. “That middle ring, the first-home buyers who are trying to get their first place, they’re just going to be stretched.”

Mr Hartley, whose firm mainly deals with first-home buyers, said the change to an October 1 start date instead of January 1 had brought forward demand and already created a heightened sense of urgency among buyers. “It’s the fear of missing out and the fear of having more competition when the 1st of October kicks in,” he said.

Suburbs at Risk

Cotality research director Tim Lawless predicted that fewer suburbs would meet the price caps over time, especially in more desirable locations. “There’s a little patch of Sydney, for example, of suburbs that are still within 20 kilometres of the CBD, that have a median house value below the one and a half million mark. I don’t think they’ll last long.”

Currently, half of all suburbs nationally have a median house value that is equal to or below the scheme’s new price caps, while 93 per cent of suburbs have a unit value that is equal to or below the price caps, according to Cotality.

In Sydney, suburbs within 20 kilometres of the CBD with median home values below the $1.5 million cap include Marsfield ($1.425 million), Lakemba ($1.4 million), Auburn ($1.3 million), Bankstown ($1.4 million), and Parramatta ($1.4 million).

Melbourne first home buyers currently have more than a dozen suburbs to choose from within 10 kilometres of the CBD that have median house values below the $950,000 price cap. The closest suburb to the city under the cap is Footscray, which has a median house price of $900,000 and is 3.4 kilometres from the city. Other options include Maribyrnong ($910,000), Reservoir ($810,000), and Heidelberg West ($773,500).

In Brisbane, the closest suburb to the CBD with home values under the new $1 million price cap is Keperra, which is 6.6 kilometres from the city and has a median house value of $970,000.

“We’re going to see higher prices for more affordable homes from this first home buyer incentive,” Domain research chief Nicola Powell said.

Estimates Questioned

While Prime Minister Albanese and Minister O’Neil cited private Treasury advice that the program was expected to increase house prices by just 0.5 per cent nationally over six years, economists and mortgage brokers expect property prices in suburbs popular with first home buyers will jump significantly more.

“The reality is that more buyers with potentially unlimited incomes will now flood into the same price brackets, creating intense competition,” Mr Finch said.

AMP chief economist Shane Oliver warned that property prices would certainly rise, saddling first home buyers with larger mortgages and ultimately debt. “If you’ve got falling interest rates and the startup of this expanded scheme, it could supercharge the boost to property markets that otherwise would not have occurred,” he said. “So it’s great news for existing home owners, but I don’t really think it’s good news for new home buyers.”

Market Conditions

National home prices rose 0.5 per cent in September to a new peak, according to data from REA Group’s research arm PropTrack. Prices have increased by 6.2 per cent across the past year, adding about $54,100 to the value of the median home that now stands at $845,000.

REA Group senior economist Eleanor Creagh said despite the Reserve Bank keeping interest rates on hold, the housing market was set for further gains during the busy spring selling season. “While affordability pressures remain, this year’s series of interest rate cuts, improved sentiment and the October expansion of the Home Guarantee Scheme are expected to keep upward pressure on home prices in the months ahead,” Ms Creagh said. “With stock on market constrained and new supply challenged, demand-side stimulus will intensify competition.”

Higher Debt

For those able to take advantage of the scheme, the benefits are significant. A couple looking to buy a home at the Sydney price cap of $1.5 million with a combined disposable income of $123,674 should on average be able to save a five per cent deposit in two years and 10 months – more than seven years faster than it would take to save a 20 per cent deposit.

A Melbourne couple with a combined median disposable income of $105,410 would need two years and two months to save for a home at the price cap of $950,000, down from nearly eight years. In Brisbane, with a $1 million price cap, first home buyers will save nearly six years and be able to have a deposit in just over two years.

However, the scheme means buyers will have 95 per cent of their debt to pay off – a very high level of debt that leaves first-home buyers vulnerable to interest rate changes.

Opposition housing spokesperson Andrew Bragg was critical of the scheme being open to all first-home buyers without any income testing. “This is an uncapped scheme which is available to billionaires, or the children of billionaires, if they want to use a government program,” he said, warning of taxpayers “underwriting mortgage insurance schemes for extremely wealthy people.”

Critics also argue the scheme doesn’t address the fundamental issue of housing supply. Everybody’s Home, a national campaign aimed at addressing Australia’s housing crisis, said the scheme was “good for some” but was “not a solution to the housing affordability crisis for all.”

“The real solution to Australia’s housing crisis is to bring down the cost of housing for everybody through measures including tax reform and more social housing,” spokesperson Maiy Azize said. “To tackle the housing crisis, the federal government must make major investments in social housing; these are low-cost rentals that are guaranteed to remain affordable.”

Affordability Challenges

PropTrack senior economist Angus Moore said first-home buyers still faced significant affordability challenges, after rapid price rises in recent years and rapid interest rate hikes in 2022 and 2023.

“To put that in context, a median-income prospective first-home buyer household across Australia – 25 to 39 years old, renting and earning a little under $130,000 a year – could afford to service the mortgage on 17 per cent of homes, the lowest on our records,” he said.

“While the expanded Home Guarantee Scheme helps with the deposit hurdle, the challenging state of affordability will still be a constraint for many first-time buyers.”