Why are lower-priced homes surging in value?

Over the first six months of the expanded scheme, homes under the caps increased in value by 6.7 per cent, compared with a 3.6 per cent rise for properties above the thresholds.

While the scheme has accelerated this divergence, with the gap emerging around its announcement in late August, several factors are contributing to stronger growth at the lower end of the market.

Scheme impact and shrinking availability

Since the expansion, lower-priced homes have increasingly outperformed, a trend that has become more pronounced in recent months.

According to Housing Australia, more than 300,000 people have now used the scheme, highlighting the scale of demand being directed into this segment.

Melanie Smith, mortgage broker and franchisee at Mortgage Choice Windsor, said she had seen the schemes directly impacting prices.

“First home buyers are getting really good opportunities to get into market now that the schemes have evolved to include more eligible buyers and properties,” she said.

“These buyers would have been saving for longer, or just not getting into the market at all, without these schemes. But the flow-on effect is that they are pushing the prices up to meet the demand. And competition is hot.”

As prices rise, more properties eligible under the scheme are also becoming subject to stamp duty, adding a new cost pressure for buyers.

At the same time, price growth is reducing the pool of eligible properties.

Prior to the scheme’s expansion in October, 48.6 per cent of suburbs nationally had a median house value below the price caps, and 92.7 per cent were below the caps for units. By March, this had fallen to 39.5 per cent and 89.1 per cent, respectively.

Darwin recorded the sharpest decline, with just 10.3 per cent of suburbs now below the $600,000 house price cap, down from 32.4 per cent, while Perth has also seen a steep drop, with only 11.6 per cent of suburbs remaining under the cap.

Despite its higher price point, Sydney still has the largest share of suburbs under the cap at 46.8 per cent, supported by a higher $1.5 million threshold and relatively modest recent price growth.

Investor demand adds to pressure

Demand at the lower end is not limited to first home buyers, with investors also targeting the same price bracket.

Cotality noted investors accounted for 40 per cent of mortgage demand in the December quarter, above the long-term average of around one-third.

Speaking on Broker Daily Uncut, Finni brokers Costa Arvanitopoulos and Eva Loisance said this segment remains attractive for investors.

“It’s a decent price point for investors of course because of the strong price growth itself,” Arvanitopoulos said.

“But it’s also a good price point for investors because it’s a good balance between capital growth and rental yield. As soon as you go much higher, the yield doesn’t follow and the numbers don’t work.”

Serviceability driving demand lower

Serviceability constraints are also pushing buyers towards more affordable properties.

“With higher home values and elevated interest rates, serviceability constraints are likely to be pushing demand toward lower-priced, more affordable properties,” Tim Lawless, Cotality’s research director, said.

The Reserve Bank of Australia has lifted the cash rate to 4.35 per cent, with further increases anticipated, adding to borrowing pressures.

Recent data, reported by Broker Daily, has shown how rising rates and economic shocks can move people down the property ladder to different extents across the country.

“People can afford less in these circumstances, but they’re also worried about the future, which leads to a more conservative outlook,” Loisance said.

This has also flowed through to first home buyers. ABS data shows the average first home buyer loan increased 7.7 per cent in the December quarter to $606,400. However, subsequent rate rises have reduced borrowing capacity, with a household earning $100,000 now able to borrow around $34,300 less.

With the 3-percentage-point serviceability buffer applied to an average variable rate of 6.01 per cent, Cotality noted that borrowers are now being assessed at interest rates of around 9 per cent or higher.

Demand likely to moderate

Lawless said some of the recent price growth may reflect demand being brought forward ahead of the scheme’s launch.

“This has likely brought forward demand from those who didn’t necessarily need to rely on the deposit guarantee,” he said.

He added that the scheme’s stimulatory impact is likely to ease over time.

“Overall, it is likely first home buyer deposit guarantee will gradually lose its stimulatory power, with more homes exceeding the price thresholds and a growing portion of prospective buyers running into a finance hurdle that is set to rise further,” Lawless said.

“Demand from first time buyers looking to purchase a house is likely to skewed towards the outer fringes of the capital cities or regional markets where price points are lower.

“More affordable and widespread options are available to first home buyers across the unit market, which is likely to become an increasingly popular option for budget conscious buyers looking to participate in the deposit guarantee scheme.”

[Related: Consumer confidence falls to record lows]

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