Fighting fire with fire: why grants fail first home buyers

I don't envy first home buyers.

In Australia, assisting our first home buyers is a structural part of housing policy rather than a marginal or symbolic intervention.

We have multiple levers, national coverage, ongoing programs, accessibility by different demographics, and a combination of cash grants with others.

Compared to the United Kingdom, Canada, the United States, Singapore, Ireland, Finland, Portugal, Norway, Chile, Malta, Japan, Colombia and Spain, for example, Australia stands out for having one of the most comprehensive multilayered first home buyer support systems.

And yet, I do not envy first home buyers.

How to help all

On a foundation level, public policy is a wicked problem. Public policy must benefit all whom the policy is directed to equally, in a timely manner, with the least number of resources.

Balancing this is impossible - especially being equitable.

Is there a standard first home buyer? Are they all in the same financial position?

The federal government's latest assistance package, the First Home Owner Grant (FHOG) is designed to assist first home buyers enter the property market quicker, by cutting down the time to save for a 20 per cent deposit (to avoid lenders mortgage insurance).

It assists them with their purchasing power, allowing them to compete with other buyers in the market.

Friend or foe?

Between September 2016 and September 2025, the number of first home buyer loans approved increased by 34 per cent nationally.

In 2024-2025 South Australian first home buyers benefitted from $46.6 million in grant contributions and $73.5 million in stamp duty relief.

The FHOG led to over 200 new homes being built in the Northern Territory and contributed to a 23.4 per cent increase in the number of FHBs entering the market in the year to June 2025.

There is anecdotal evidence of the FHOG cutting down the number of months in saving for a deposit, especially if one was able to combine different schemes and incentives.

Therefore, from a policy outcome perspective, one can argue that the FHOG is a friend.

However a key consequence of the FHOG is the "bring-forward effect", as the government grant results in short-term artificial surge in buyer activity.

This spurs immediate short-term price growth, rather than long-term housing accessibility and affordability.

The data backs it up.

The number of first home buyers entering the market has increased, but the average first home buyer loan has also increased: from approx. $320,000 in September 2016 to $560,000 in September 2025.

Further, the strongest response to the FHOG was in 2020-2021, when enhanced state first home owner grant and the temporary home builder grant were introduced.

First home buyer loan applications increased by 80 per cent between June 2020 and March 2021.

The bring-forward effect is not a one-hit wonder.

In Greater Brisbane, a significant 27.5 per cent median house price increase occurred from 2023 onwards, coinciding with the Queensland Government FHOG being at its highest, of $30,000.

Nor is the bring-forward effect exclusive to a capital city.

In November 2025, one month after the introduction of the federal government's 5 per cent scheme, the Illawarra in regional New South Wales experienced a 1.1 per cent increase in median house price.

Case studies in regional Australia, where first home buyer activity increased due to its affordability compared to a nearby capital city, are plentiful.

The problem is, when the grants were scaled back or removed, first home buyer activity declined.

The only way to re-energise? Another scheme or extension of the current FHOG.

Fighting fire with fire

The kicker for me, is the FHOG's policy consequence.

The FHOG causes a structural, causal impact of higher property prices.

This has a multiplier effect: a) present first home buyers must commit to a higher level of debt and b) future first home buyers are subject to higher property prices.

This case of fighting fire with fire is the hidden cost of FHOGs.

Looking further afield

Australia is not the only nation with first home buyers, so what can we learn from others?

In Denmark, first home buyers access mortgage interest tax deductions and low-risk mortgage structuring.

Mortgages are funded through covered bonds, which are liquid, allowing borrowers to refinance if interest rates change.

In Singapore, first home buyers access government grants when buying public housing.

These houses are met with price caps on resale values, to avoid large capital growth and ensure affordability for future first home buyers.

First home buyers in the United Kingdom can purchase a portion of a home and pay rent on the rest.

This means they can get their foot in the door and work their way to ownership, with a guaranteed place to live.

Housing is sold below market price initially, with strict resale rules and doesn't create additional competition for existing homes in the market.

Of course there are other intricacies that must be considered, as any good public policy reconfiguration should.

I have worked with first home buyer clients and have many first home buyer friends and family.

I acknowledge that many are thankful to the FHOG.

But the FHOG come with hidden consequences that are often overlooked by eager first-time buyers.

And that is why, ultimately, I do not envy first home buyers.

Dr Diaswati (Asti) Mardiasmo is PRD's Chief Economist