Are government grants pushing up property prices?

Government grants can provide a helpful boost into the property market but if used without scrutiny can actually cost buyers more than they save.

Government schemes designed to help first-home buyers get into the property market often come with unintended consequences.

Incentives like the First Home Owner Grant or the Home Guarantee Scheme (or First Home Guarantee) can actually influence property values, sometimes creating a false sense of financial security for buyers.

The First Home Guarantee (FHG) is a federal government scheme that allows eligible first-home buyers to purchase a property with as little as a 5 per cent deposit, without the need to pay Lenders Mortgage Insurance (LMI).

Normally, lenders require a 20 per cent deposit or charge LMI to cover the risk of a smaller deposit, but under this scheme the government effectively guarantees the remaining 15 per cent, with the cap in New South Wales set at $1.5 million.

In addition, many buyers also benefit from the First Home Owner Grant (FHOG), a one-off lump sum payment from the state government, usually ranging from $10,000 to $15,000 depending on the state or territory.

The FHOG typically applies to new builds or substantially renovated homes, and while it provides a useful boost to savings, it can also fuel additional demand in the new-build market, with some developers pricing properties to absorb the grant.

At face value, these schemes sound like generous helping hands for first-home buyers. In practice, they can act as artificial ceilings that shape buyer behaviour.

Properties priced just below the guarantee’s $1.5 million cap often experience heightened demand, with many buyers determined to bid right up to the threshold.

Here’s how that plays out in real terms, a property genuinely worth $1.45 million may end up selling for $1.5 million simply because the demand at that cap level drives up competition. Effectively, buyers could be paying an additional $50,000 on a property that isn’t intrinsically worth that amount.

On the flip side, properties priced just above the cap say, at $1.55 million often see less demand, because first home buyers are reluctant to exceed the scheme’s threshold and that ultimately leaves the non-first home buyers to bid on the property, reducing the demand pool. In these cases, you might actually find better value, as fewer people are competing and sellers may be more negotiable.

This creates what I’d describe as a “pressure-cooker effect” within the capped range.

While the schemes undeniably help many people access the property market sooner, they also risk inflating prices for those operating within their limits.

Mortgage brokers I’ve spoken to have confirmed an uptick in activity among first home buyers trying to get their finance organised ahead of the 1 October start of the FHG scheme to allow all first home buyers to purchase a property with only a 5 per cent deposit. This rush of demand, layered on top of the cap-driven psychology, can compound the pressure.

From a valuation perspective, it’s important to remember that no matter how much you offer or what the contract of sale says, the bank will ultimately lend against the property’s market value as outlined in the property valuer’s valuation report— not your purchase price.

A property valuer, like myself, prepares an independent report for the bank. If the valuation comes in lower than your agreed purchase price, you may find yourself in a financing shortfall.

This is where first-home buyers, caught up in the excitement of incentives and competition, can face real risks.

So, how can first-home buyers navigate this environment wisely? Here are five tips from a valuer’s perspective:

1. Don’t assume the cap sets the value

Just because a government scheme allows you to purchase up to a certain figure doesn’t mean the property is worth that amount. Always assess the true market value.

1. Be cautious about overbidding

Competition near scheme thresholds can drive prices up artificially. Set a firm limit based on what the property is genuinely worth, not just on what the scheme allows.

1. Look just above the cap

You might find better opportunities slightly above the threshold, where there’s less buyer demand. These properties can offer strong value with less competitive pressure.

1. Keep renovations and upgrades in mind

If you do buy, track any improvements you make on bathrooms, kitchens, fences, or repainting. These can help increase your property’s market value and bank valuation.

1. Remember the bank relies on valuations

The bank lends against the property’s assessed market value, not your purchase price. Always factor in the possibility that your valuation may come in lower than what you’ve agreed to pay.

Government incentives are valuable tools to help people achieve home ownership, but they are not without pitfalls. By understanding the way these schemes influence buyer behaviour and property prices, first home buyers can make better, more informed decisions.

In some cases, that might mean seizing the opportunity to buy just outside the cap; in others, it might mean holding your ground and not letting competition push you past the property’s true worth.

At the end of the day, getting into the market is important if it aligns with your goals, but doing so with a clear understanding of value will protect you in the long run.

(Source : Australian Property Investor Belinda Botzolis, Valuer 12th Sept 2025)