In the long run, the real challenge lies in reforming how land is released and who pays to make water flow uphill.’ 

Over the weekend, both major parties announced policies supporting first home buyers who build new homes. These are the ‘easy-good’ policies. They lower the cost of home ownership and will see an increase in housing supply by patching over underlying policy failures. 

Both parties also outlined longer-term infrastructure strategies which are more complex, less politically glamorous, and far more important. These are the ‘hard-smart’ policies that can genuinely shift the dial on housing supply, even if their effects won't be felt this decade.

First Home Guarantee: A Quiet Policy Success

The ALP’s plan to expand access to the Home Guarantee Scheme (HGS) is particularly sound. This scheme effectively replaces Lenders Mortgage Insurance (LMI), around a $25,000 cost typically borne by a first home buyer with a 5 per cent deposit—with a government-backed guarantee. While LMI protects the lender (not the buyer), the cost is passed entirely to the buyer and repaid over decades.

Since its launch in 2020, the HGS has supported around 140,000 buyers, with just three reported defaults. That’s over $3.5 billion in collective savings for first home buyers, at a cost to government of less than $100,000. This is a textbook example of correcting a market failure.

Mortgage delinquency in Australia has been historically low, even though the GFC and the pandemic. Yet over the past 15 years, a steady stream of regulations has made it more expensive for banks to lend to first home buyers. These rules were meant to reduce default risk to banks, but they've also raised effective interest rates for new borrowers and simply disqualified an increasing number of them entirely.

Given these conditions, HIA estimates the expanded HGS could support the construction of 10,000 additional new homes and this is likely to occur with negligible direct cost to revenue.

In fact, the expansion of this program is likely to be revenue-positive from the GST alone, not to mention Stamp Duty, income tax, etc, etc. So why wasn’t it scaled up earlier? Because the scheme can bring forward demand and temporarily inflate prices in the established home market. To avoid this, governments have expanded it slowly over five years. This was the right way to expand the program.

With around 100,000 to 120,000 first home buyers entering the market annually, and about a third choosing to build new and 40,000 accessing it last year, the expanded scheme is expected to have minimal impact on established prices. 

The impact would be similar to each of the past four years adjustments to the HGS and a cut to interest rates and low unemployment will have a far greater influence on home prices. The small increase to new home building as a result, will also have a negligible downward impact on home prices over the medium to long term.

Coalition’s Deduction Policy: Strong Incentive, Strong Supply Response

The Coalition’s proposal to allow mortgage interest deductibility for first home buyers (building new homes only) is another solid policy. It offers up to $12,500 per year for five years—totalling $62,500 per household.

Initially this would be heavily weighted toward detached homes, due to shorter build times, but over time, the split is likely to revert to a 50/50 (detached/unit) split. The scheme would see loans accessed from completion of the home, therefore a delay in accessing the scheme for ‘off the plan’ apartments is likely. Spec homes are typically considered new homes.

Unlike short-lived programs like HomeBuilder, this initiative isn't time-limited, making it less likely to draw forward first home buyer decisions. HIA estimates this could drive the construction of at least 30,000 additional new homes annually as first home buyers move out of the established market, to new homes.

The Real Bottleneck: Land Supply

Australia’s home construction levels remain at a decade low. Only 166,000 new homes commenced in both 2023 and 2024—the lowest since 2012. The industry has previously delivered 200,000–220,000 homes per year and will need to exceed 250,000 annually to meet the national housing target.

Material shortages have eased, but labour shortages remain due to competition from other construction sectors and mining. A sustained uplift in home building would help retain labour in the sector.

Yet the main constraint remains land. Even with the best buyer incentives, we won’t achieve the structural increase in housing supply without fixing land release, planning timelines and infrastructure funding.

Infrastructure: The Hard-Smart Policy Australia Needs

Australia’s approach to infrastructure funding since the 1990s has shifted to “user pays,” loading new home buyers with upfront costs for not just infrastructure, but its taxation and ongoing maintenance. These costs are then taxed again via GST and stamp duty. We have taxed new homes into scarcity requiring government support to allow FHB’s into the market.

Reforming this model will take decades, but federal support via subsidies or grants to local councils to accelerate land release, can help ease the upfront burden. Reducing the upfront cost of infrastructure on a new home buyers, along with other reforms such as relieving local councils of the responsibility of undertaking planning assessments, instead to focus on planning design, are central to any credible housing policy.

Conclusion

Supporting first home buyers is an important first step. The real work lies in fixing the systems that make housing expensive to build in the first place.

Amongst an electorate where millennials and Gen-Z now outnumber Boomers, first home buyer policies win votes, but only reform of infrastructure funding will solve the problem. Whichever party forms government, their commitment to these ‘hard-smart’ policies will be the true measure of their resolve to end Australia’s housing shortage.

"Who pays to make water flow uphill"

For more information please contact: