Are 5 per cent deposits the leg-up first home buyers need, or are they pouring fuel on the fire?

Elizabeth's Australian dream was just out of reach — until the government came to her help.

Married with four children and a fifth on the way, the maths for a 20 per cent deposit just did not add up. Elizabeth and her husband Stephen, who run their own small business, would need to eat into their emergency fund to buy their home.

"We had the cash reserves to be able to cover our mortgage for a year or more, even after buying. But we didn't want to use those savings to get into the market because it would have made us very financially vulnerable," she told the ABC.

But when 20 per cent became 5 per cent thanks to the federal government guarantee, the maths changed and the dream came to life.

"We thought for a long time that we'd have to buy in a cheaper suburb. But because of the scheme … we were able to buy a lovely home in the same suburb my husband was born and raised in, the community we've raised our own children in for 11 years."

The couple bought before the scheme was expanded last month to cover all first home buyers. The federal government has trumpeted that expansion, which it believes will allow many more Australians to achieve their own dreams.

But there are also fears it will backfire and make the problem worse — that by trying to use a rising tide to lift all boats, the affordable housing of a generation ago will slip further underwater.

Last week, it was revealed that the first month of the expanded scheme saw the fastest price growth in two years, concentrated at the bottom and the middle of the market, where first home buyers were most likely to be found.

The government accepts the view that the ultimate solution to the housing crisis is to build more homes. But it is convinced it can still offer help to first home buyers in the meantime, with only a "modest" impact on prices.

Stories like Elizabeth's are exactly the kind it hopes to see, but they are far from the universal experience.

For Asha and her partner, the search for a home has turned into a cross-country odyssey. The pair relocated to find something affordable and are trying to buy today using the scheme.

But Asha is pessimistic about the market turning in her favour.

"We moved from Sydney to Brisbane hoping we could afford here, and it's a little more affordable, but still a challenge," she told the ABC.

"It feels as though the scheme is adding fuel to the fire.

"My husband and I earn well over double the average household income and feel like owning a house is a pipedream, so I can only imagine how lower-income families must be struggling."

Is the deposit guarantee giving first home buyers a head start in a race to the bottom?

Help for first home buyers, with strings attached

First home buyers can choose from a veritable buffet of government support schemes at federal, state and territory levels.

The criteria vary, each scheme coming with its own income caps, price caps and often with a limited number of recipients. Sometimes they can be stacked together, other times they are exclusive.

The style of support varies, too. There are simple cash subsidies or tax concessions. There are shared equity schemes, where governments purchase and own part of the home. And there are government guarantees, which save on insurance costs.

The latest offering from the federal government is the last of those, expanding an existing federal guarantee established by the Morrison government.

But what marks it out from all the others is that it is universal and straightforward to access. Just about any first home buyer, no matter where they live, what they earn and how much they have saved, can get in on the game.

The only limit is the home price, set at the average for each region. In Sydney, the most expensive city, it is $1.5 million. In Hobart, the cheapest capital, it is $700,000.

The universality is central to its political appeal. Just like the HECS debt relief, the bulk-billing incentive and the medicine subsidy Labor offered at the last election, it allows MPs to sell their constituents a simple message: "we're helping everyone".

It also avoids the high-stakes jigsaw puzzle that Alex, 33, and his partner Angus, 36, experienced trying to use the Victorian government's shared equity scheme.

Under shared equity schemes, the government owns part of the home. By effectively reducing the house price and providing a government guarantee, the Victorian scheme can facilitate deposits of as little as 5 per cent. A federal version will open soon, called Help to Buy, with deposits as little as 2 per cent.

But to use the state scheme, Alex had to apply to receive one of a limited number of places and then had just a few weeks to find a home within the price range, with the clock ticking.

Even with a limit of $950,000, seeking only a two-bedroom house with one bathroom and a parking space, Alex said it was "like finding a needle in a haystack".

"You look on real estate websites and lots of properties pop up, but at auction it always seems to blow out from what the price said," he told the ABC.

"And the pressure is there because you're only pre-qualified for a certain period of time; otherwise, you have to go through the entire process again. It was a bad experience."

The price cliff

The time pressure and the paperwork would be removed if Alex were buying today with the expanded deposit guarantee. But the price cliff at $950,000 in his home city of Melbourne would be the same.

For Alex, that was the greatest source of stress.

"Once you hit that point, you instantly can't be in the running because suddenly it's a 20 per cent deposit again," he said.

"Some person can just go to $951,000 and we have to bow out. It's almost like you've been given a credit card with a max, but you're up against high rollers."

Alex suspected other younger buyers he encountered at auctions were in the same boat.

"They always seemed to bow out at the same time as us," he said.

It is the same problem first home buyers like Asha are already finding when trying to use the expanded deposit scheme.

"We can't keep our head above water," she said.

"It reaches $1 million [the limit in Brisbane] and investors are able to add an extra couple of thousand to an offer to price out first home buyers, knowing we can't afford over that amount."

Modest effect on prices, or more than that?

There are heavy limitations on what can be concluded from just one month of the expanded scheme. But the early signs suggest at least a moderate effect on prices.

Cotality's home value index recorded price growth of 1.1 per cent in October, the fastest growth since June 2023. In the middle of the market, this was 1.4 per cent, and 1.2 per cent at the bottom of the market.

But house prices are buffeted by all sorts of factors, and it is not straightforward to disentangle what effect, if any, the scheme has had. Prices have been rising for several months, in part because of lower interest rates and sluggish housing supply.

"Yes, it coincides with the expansion of the deposit scheme, but we have to remember seasonally in spring you get a bit of a bump [and] we've also seen a reduction in interest rates," Cotality head of research Eliza Owen said.

A deeper dive into the figures shows inner city areas, wealthy suburbs and fast-growing regional towns are among the fastest-growing.

Figures released by the government indicate that 5,778 homes were bought using the guarantee in October. That would represent one in 10 sales in a typical month — modest, but not insignificant.

That includes first home buyers who were already eligible under the older version of the scheme. A year earlier, with the older version in place, there were 3,901 sales in October, suggesting an uplift of just more than 1,800.

"What these numbers tell us is that this program is working. It's making a big difference to the people who need our help, but only bringing a moderate number of new buyers into the market this first month," Housing Minister Clare O'Neil said.

Labor said the numbers were consistent with Treasury modelling showing the scheme would only lift prices by 0.6 per cent in six years — an extra $6,000 on a $1 million home, compared to if the expansion had not happened.

It has resisted releasing any further details of this modelling, making it hard to interpret it. For example, it is reasonable to expect the model would have found a larger price impact at the lower end of the market, and perhaps a larger short-term impact.

Liberal housing spokesperson Andrew Bragg, who said the scheme was "turbocharging" the market, has used Senate processes to request the publication of further details.

Life after a deposit

Higher prices could bring about the opposite problem to first home buyers getting outbid by investors: that first home buyers win, but bite off more than they can chew.

That warning has been sounded by several experts and financial commentators, including prominent investment blogger Scott Pape, a strident critic of the scheme.

At the root of this concern is the fact that first home buyers with higher purchasing power, thanks to the scheme, will also end up with bigger loans and may encounter greater difficulty servicing their mortgage.

Government figures suggest a vanishingly small number of first home buyers have defaulted on their mortgages in the years of operation of the earlier scheme, suggesting this problem may be minor.

But for would-be home buyers whose primary challenge is servicing a mortgage rather than stumping up a deposit, the scheme may not be so helpful.

James, in his early 30s and looking to buy a two-bedroom apartment to live in with his young daughter, is in a similar position.

"If I magically fell into [a 20 per cent deposit] for a $600,000 apartment, I would still have a stretched budget," he said.

"I would need to save an extra $125 a fortnight just to cover the higher loan with a 5 per cent deposit … Schemes like this do nothing to help purchase properties when the size of the loan required is financially unviable anyway."

It is a delicate balance for the federal government, given the financial situations of Australians vary so widely, which may be why Ms O'Neil's main focus is getting initiatives off the ground to get more homes built to make homes genuinely more affordable.

The latest of those supply initiatives will trial a way to support first home buyers on the supply side: a $10 billion federal fund promises to build 100,000 homes that only first home buyers can buy.

But in the meantime, the government is left to hope that by lining the pockets of first home buyers, it can ease some of the short-term pain.

Elizabeth and Stephen are exactly the sort of people the expanded scheme may be best placed to help.

Their incomes are high enough that they can comfortably manage their mortgage payments, but their need for a rainy-day fund as small business owners means the deposit hurdle is a real one.

But Elizabeth herself is torn in her view of the scheme.

"Philosophically, we're not actually fans of the government being involved in boosting the housing market, and definitely see concerns about it raising the bottom end of the market," she said.

"But we also weren't going to ignore a scheme that could help us on that principle."

Editor's note (12/11/2025): An earlier version of this story said Alex used the federal government's Help to Buy scheme. That scheme is not yet in operation. Alex used the Victorian government's version of the same scheme, which had the same price cap of $950,000 per home in Melbourne.