First home buyers finally get the upper hand in Australia’s housing market

Government reforms, falling interest rates and rising wages are combining to give first home buyers their best chance in years to break into the market, writes Stephen Koukoulas.

FOR MANY PEOPLE frozen out of the housing market for the past decade or more, the possibilities of getting their first house are taking a remarkable turn for the better.

The opportunities for first home buyers to tap into the housing market are being materially enhanced by a range of policy changes, which will inevitably lead to a strong rise in first home buyer activity over the next few years.

This good news for first home buyers is directly the result of key reforms from the Albanese Government, as well as the influence of lower inflation and, hence, lower interest rates and rising wages.

The 5% deposit scheme, which is exclusively for first home buyers, avoids mortgage insurance for buyers with a deposit of less than 20% of the purchase price of a dwelling. The 20% deposit threshold generally needed to avoid having to pay mortgage insurance has been an impediment to buyers struggling to cobble together a savings pool to use as a housing deposit.

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This problem has been circumvented with the Government’s 5% scheme, where the deposit for a $600,000 dwelling, for example, is now $30,000 against the previous benchmark of $120,000. Further, the insurance savings can run into the tens of thousands of dollars for each home buyer.

It means that potential home buyers with a 5% deposit have a much greater chance of buying into the housing market.

It should be noted that the size of the borrower’s loan will increase the more the deposit gravitates from 20% towards 5%. The lenders of a 95% loan will, of course, still undertake all the necessary due diligence before approving any loan. This means that the policy will have a negligible impact on loan quality as financial institutions focus on creditworthy borrowers.

In another leg up for many first home buyers, the Government has cut outstanding student debt (H.E.L.P. or HECS) by 20%. From the perspective of access to housing, this is important because student debt is a factor that banks take into account when approving a mortgage. The lower the level of debt, including student debt, the more likely it is that the application for a mortgage will be approved.

The level of outstanding student debt is heavily skewed to young people, the very ones that have been finding it difficult to get a mortgage for their first house.

But wait, there’s more

In addition to these targeted policies, some key macroeconomic trends are having a favourable effect.

With the interest rate cutting cycle, which started in February 2025, continuing to roll out, the borrowing capacity of borrowers, including first home buyers, is materially enhanced. Lower interest rates lower the debt servicing requirement for a mortgage of a particular value, enhancing the attractiveness of borrowing for a property.

The three interest rate cuts seen to date are likely to be followed up with two or perhaps three more rate reductions over the next 12 months.

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Rising wages are also helping first home buyers. After a decade of weak and decelerating wage growth, the last three years have seen annual wage growth lift to around 3.5%, well above the 2-2.5% pace prior to 2022.

With inflation falling back to the Reserve Bank's 2-3% target band, the resulting rise in real wages is improving household cash flow spending on essential items, which is freeing up income to be directed to the housing market.

The number of new dwelling building approvals is also picking up steam. From the low point in 2024, the number of new building approvals has risen 35%. Once these approvals turn into completed dwellings, over the next 12 to 24 months, the additional supply will be available to meet demand. In other words, over the next few years, the solid increase in the supply of dwellings will dampen price rises and provide first home buyers with additional choice.

These policies, in total, will also help to lower dwelling rents or at least cap any rent increases. As first home buyers exit the rental market and become owner-occupiers, rents will face downward pressure due to the low level of demand. This will help renters and will, at the margin, provide a further disincentive for investors to tap the dwelling market, given a downward tilt to yields as rents fall.

Overall, the dynamics are lining up to favour first home buyers. Of course, it remains a challenge to buy a house, but for the first time in many years, the first home buyer segment is set to get an upper hand at least relative to investors.

Stephen Koukoulas is one of Australia’s most respected economists, a past chief economist of Citibank and senior economic advisor to an Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk.