The scheme meant to get first home buyers in is quietly lifting the floor beneath them

I run a free service that helps first home buyers, and part of how it stays free is that we refer people to brokers, including brokers who write loans under the federal 5 per cent Deposit Scheme. So when I say the scheme is doing something we should worry about, understand that I am arguing against my own commercial interest. I am doing it because the data is hard to look away from.

When the Australian Government 5 per cent Deposit Scheme went uncapped on 1 October 2025, the intent was simple and decent: let first home buyers in with a 5 per cent deposit and no lenders mortgage insurance, rather than making them assemble 20 per cent. As a way of getting an individual buyer over the deposit hurdle, it works. The problem is what happens when a whole cohort of buyers gets the same help at the same time, all shopping in the same part of the market.

The floor is rising faster than the ceiling

We analysed Cotality value data for the six months to March 2026, splitting each market into homes priced below the scheme's price caps and homes priced above them. If the scheme were neutral, the two halves would move together. They did not.

Nationally, homes valued under the caps rose 6.7 per cent, while homes above the caps rose 3.6 per cent. In Sydney the divergence was starker still: homes under the cap rose 4.1 per cent while homes above it actually fell 1.1 per cent, a gap of 5.2 percentage points between the part of the market first home buyers can reach and the part they cannot. The pattern was not a Sydney quirk. It held in every capital, and in every regional market except regional Western Australia and the Northern Territory. Of the 88 local markets Cotality examined, 81 grew faster below the caps than above them.

The consequence shows up most clearly as disappearing choice. The share of suburbs with a median house value sitting under the caps fell from 48.6 per cent in September 2025 to 39.5 per cent by March 2026. In six months, the affordable end of the map shrank by nearly a fifth. For units the fall was gentler, from 92.7 per cent to 89.1 per cent, which is one reason units remain the realistic entry point for many buyers while houses recede.

The full analysis, the method and the chart are published openly at nestpath.com.au/research/the-5-percent-trap, free for anyone to check or reproduce.

The mechanism is not mysterious

A price cap on assistance acts like a magnet on the cheap end of each city. Tell a large group of credit constrained buyers that the government will backstop their deposit up to a certain price, and demand concentrates in the band just beneath that price. Sellers and the market respond as markets do. The homes the scheme makes reachable become, in aggregate, less reachable, because everyone the scheme helped is now bidding for them at once.

This is the difference between a policy that works for a person and a policy that works for a population. For the individual buyer who uses the scheme this year, it is a genuine door. For the cohort of buyers behind them, the scheme has quietly raised the very floor it was built to help them stand on. Both things are true at the same time, which is exactly why the scheme is so easy to defend and so hard to assess honestly.

What honesty about this would look like

I am not arguing the scheme should be scrapped. Individual buyers are helped, and telling a family who just bought that they were part of a problem would be both cruel and useless. But three things follow from the data.

First, demand side help without supply side response has a predictable failure mode, and we are watching it run in real time. If the number of homes under the caps does not grow, subsidising more buyers to chase them lifts their price. That is not a flaw in the scheme's administration. It is arithmetic.

Second, we should measure schemes like this on the aggregate, not only the anecdote. The relevant question is not how many buyers were helped in, which will always look good, but what happened to the affordability of the homes they were helped into. That second number is measurable, and right now it is moving the wrong way.

Third, transparency about who benefits should be routine. I have a commercial interest in more people using this scheme, and I have told you so. The lenders on its panel, the brokers who write its loans, and the developers selling just under its caps all benefit too, and rarely say so. A policy this popular deserves at least the scrutiny we would give one that was unpopular.

The 5 per cent Deposit Scheme is not a scandal. It is something more ordinary and more instructive: a well meant demand side intervention doing exactly what demand side interventions do when supply does not follow. We should watch the floor, not just the doorway.