The Housing Industry Association’s (HIA) Chief Economist, Tim Reardon, says the Federal Government’s decision to remove the requirement for first home buyers (FHBs) to purchase Lenders Mortgage Insurance (LMI) will ultimately lower rents and house prices, despite a likely short-term increase.
Announced this week by Minister for Housing Claire O’Neil, the policy change is expected to come into effect on 1 October 2025. Under current rules, introduced in 2000, FHBs with deposits of less than 20 per cent must buy LMI, which today typically costs around $25,000.
Reardon argues the requirement has long reduced the ability of FHBs to enter the market, forcing them to rent for longer, pushing up rental demand, and in turn increasing rents. He said LMI has also constrained new housing supply, as around one-third of new homes are normally purchased by FHBs. “By reducing FHBs’ ability to gain a loan, it reduces the number of new homes commencing construction,” he said.
Over the past two decades, this cycle has contributed to higher home prices, lower home ownership, and stronger investor returns, according to HIA.
In the short term, however, Reardon acknowledged that removing the LMI requirement will see more FHBs enter the market immediately, lifting demand while supply remains fixed. “There can be no doubt that at least in the short term, this announcement will see home prices rise,” he said. The impact will be concentrated in the suburbs where FHBs are most active, rather than in affluent areas.
The key question, Reardon noted, is how long it will take for increased supply to offset the initial price rise. Treasury has estimated six years, while HIA believes it will take just over three years. Reardon said HIA’s forecast is lower because the change is permanent and therefore does not have the same “draw forward” effect as short-term stimulus measures like HomeBuilder, which encouraged buyers to bring forward purchase decisions with one-off grants.
HIA expects the strongest response will come from detached home construction in greenfield areas, with fewer new apartments likely given current challenges in that sector.
“This is about time,” Reardon said. “More new home construction, fewer households renting and increased home ownership will all occur because of this policy announcement, eventually. It is also a decision that sees government taking a view on housing policy that extends beyond the next election, and for this, they should be commended.”
