PHOTO: The Australian government may provide a guarantee for 15 per cent of the loan for first home buyers, but buyers still have to be able to pay back what they borrow

The Australian government has pledged a new first-home buyers’ scheme that allows a minimum 5 per cent deposit. Is it wise to encourage home buyers with limited savings to enter the property market when interest rates are low?

Australia’s problem is not first-home buyers’ access to housing. The problem is that about 40 per cent of Australia’s population jockeys for housing in about 0.03 per cent of land mass, leading to high land prices in the cities. Consequently, the traditional quarter-acre block is not affordable for new city-home buyers, and no recent home buyer scheme will change this fact. If we really want to make housing more affordable, we need to reduce the housing footprint, and this requires changes to urban planning rules and other measures to increase housing density.

The latest first-home buyers’ scheme benefits first-home buyers, but has a marginal impact on pushing up house prices. A worry I have with this scheme is if we allow first-home buyers to buy with a deposit of 5 per cent, they may quickly have negative equity in their homes, potentially destabilising the economy.