Home Guarantee Scheme to put upward pressure on property prices

The recently expanded Home Guarantee Scheme announced in the latest Federal Budget could put further upward pressure on property prices according to experts.

PEXA’s Chief Data and Analytics Officer Scott Butterworth said while the schemes would look to aid first home buyers entering the market, the net effect could be higher prices for homes that fall under the caps.

“Most economists agree that the main effect of schemes such as the Home Guarantee Scheme is to increase the demand for new homes while supply remains restricted – forcing up the prices of new and existing homes,” Mr Butterworth said.

Craig Emerson, of Emerson Economics, said the expanded scheme, which allows first home buyers and single parents to access loans with as little as a two per cent deposit, would drive further demand in certain areas.

“The effect of price caps under the scheme will be to concentrate the increased demand on urban fringes and in rural and regional areas,” Mr Emerson said.

Commenting in the PEXA Insights Federal Budget Report, Mr Butterworth said there could be other unintended consequences of the latest Federal Budget, including higher construction costs in regional areas.

“This boost in regional infrastructure has potential crowding-out effects for some construction, materials and labour, affecting housing supply and costs,” he said.

Mr Butterworth said the Federal Government’s spending surge in the Budget would likely put upward pressure on inflation and lead to interest rate rises.

“Following the release of the Budget, market expectations shifted sharply, for the cash rate to increase to 1.8 per cent by the end of 2022,” he said.

“Markets are pricing in a 3.1 per cent cash rate by August next year.

“That’s 3 percentage points higher than it is now.

“For investors or those carrying significant debt as a result of the record low cash rates, 2022 may prove difficult, with a number of interest rate rises seeming very likely.”

Mr Butterworth said higher interest rates would create mortgage stress for many Australians.

“Australian households are among the most heavily indebted in the developed world,” he said. 

“With sharp house price rises in recent years, increases in mortgage interest rates will inevitably increase mortgage stress. 

“The likely impact of rising interest rates is for some slowing in house price growth.”

When immigration levels increase that could also put pressure on property prices according to Mr Butterworth.

“Renewed immigration flows will put some upwards pressure on house prices,” he said.

“Further, with ongoing internal migrations of capital city populations to regional centres, considerable variability in house price changes can be expected.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.