House prices in Australia could increase more than previously anticipated following the federal government's decision to eliminate limits on a first homebuyer scheme. The First Homebuyer Guarantee allows individuals to purchase a property with just a 5 percent deposit, bypassing the need for lenders mortgage insurance.

Housing Minister Clare O'Neil stated that the scheme enables first homebuyers to start paying off their own mortgage sooner rather than renting. "That's perhaps a seven or eight year period where they're choosing to pay off their own mortgage rather than someone else's, and that's a really good thing," she said.

The government has cited Treasury Department modeling, which estimates that the total impact on house prices will be around a half percent increase over six years. However, analysts believe the actual increase could be significantly higher, especially in the initial years after the scheme's implementation.

Some experts caution that while the scheme may boost first-time home purchases, it could also hinder long-term affordability. Diana Mousina, Deputy Chief Economist at AMP, remarked, "In the long-term, this is a band-aid solution. It just pushes up prices, perhaps an additional 3 percent over six years with interest rate changes."

Louis Christopher, managing director at SQM Research, expressed even greater concern, predicting a potential increase of more than 15 percent over the same period. He stated, "In the long-term, this stimulates demand, and will take away from affordability. Our view is that the scheme, combined with interest rate changes, could spark the biggest rush on housing since the GFC."

The revised scheme is set to launch in October, three months earlier than initially promised. It coincides with a trend of falling interest rates, which have already contributed to a 3 percent rise in national home values since the beginning of 2025. The Commonwealth Bank reported a 12 percent increase in applications for conditional pre-approval for home loans this year, indicating a growing interest from buyers.

Independent economist Saul Eslake noted that while the scheme may assist some first homebuyers, it does not address the fundamental issues within Australia's housing market. He stated, "It would help if governments stop doing things that needlessly inflate the demand for housing."

The government plans to remove income limits for eligibility and increase the price cap for the scheme. In Melbourne, the cap will rise from $800,000 to $950,000; in Sydney, from $900,000 to $1.5 million; and in Brisbane, from $700,000 to $1 million.

Despite the potential benefits of the scheme, the National Housing Supply and Affordability Council's report highlights ongoing challenges. It forecasts that only 938,000 dwellings will be completed during the Housing Accord period, falling short of the government's target of 1.2 million. The report also notes that the supply of new housing is at its lowest level in a decade, with 177,000 dwellings completed in 2024, significantly below the estimated demand of 223,000.

The complexities of the housing affordability crisis are compounded by factors such as demand outpacing supply, tax incentives favoring property investors, and a shortage of skilled labor for construction. Eslake emphasized the need for a shift in perspective regarding housing, stating, "We have come to see, unfortunately in this country, housing as primarily a way of accumulating wealth."

Treasury estimates suggest that the new scheme could lead to an additional 20,000 guarantees issued in the first year, potentially saving first homebuyers tens of thousands of dollars in rent by reducing the time needed to save for a deposit and purchase a home.