Would slashing first-home buyer incentives help housing crisis?

When it comes to understanding Australia’s housing crisis, there is a near-universal consensus that the problem is firmly on the supply side.

Rising migration levels and a failure on behalf of the Labor government to hit its housebuilding targets continue to push house prices to record highs across the country.

According to the Australian Bureau of Statistics (ABS), a total of 181,643 homes were approved in the 12 months to May 2025, which, while, an increase on the previous year, still substantially below the 240,000 annual figure needed to stay on track for Labor’s 1.2-million-homes-in-five-years pledge.

While rising construction costs and skilled labour shortages have been significant players in this ongoing shortage, there is a rising chorus of discontent about the restrictive amount of red tape in the housebuilding sector.

Rod Cross, lending specialist at Coffs Harbour-based North Coast Lending, has added his voice to the chorus.

Cross has seen first-hand how administrative inefficiencies have led to housebuilding bottlenecks on his patch of New South Wales.

“It’s not unusual to see delays of 12 months or more with approvals along the North Coast,” Cross told MPA. “It seems like this is a combination of lack of staff within the local government and, it seems, a fear of actually making decision.”

This is creating a major headache for mortgage brokers in the area.

“It can be frustrating in that there are added delays to funding," Cross said. "You might assess capacity and nine months later when (clients) are ready to build, capacity, policy, and prices have all moved or changed. What was initially a possibility is suddenly no longer a possibility.”

But it doesn’t have to be this way.

Cross advocates for greater collaboration between councils to help streamline the approval process and unlock more housing supply.

“In situations where a local government body is under-resourced, there could or should be an opportunity to progress approvals through a central body, or even a collective of councils,” said Cross.

This could involve understaffed councils calling on other councils with capacity to provide assistance with building approvals; an unlikely development in the age of excessive red tape and bureaucracy.

But while these band-aid solutions could provide modest relief to housing supply bottlenecks, a true fix to Australia’s housing crisis will never be found without a major shift in the cultural and economic mindset.

In pursuit of a free market

Cross acknowledges this reality, and his take is a hot one.

In Cross’s view, the political imperative that we’ve seen in recent years to go first-home buyers into homes misses the forest for the trees.

It is an emergent paradox in the current homebuyer landscape – it has never been harder to buy a home, but there has also never been more government assistance to help people buy a home.

Key measures include the First Home Guarantee, which allows eligible buyers to purchase a home with as little as a 5% deposit without paying Lenders Mortgage Insurance (LMI).

Many states – including NSW – provide stamp duty concessions or exemptions for first-home buyers, significantly reducing upfront costs.

The First Home Super Saver Scheme, meanwhile, enables buyers to save for a deposit using their superannuation, offering tax benefits. Additionally, some states have shared equity schemes, where the government co-invests in the property.

On the flipside, it is becoming harder for investors to buy properties, according to Cross. “We’ve also seen, through ASIC (Australian Securities and Investment Commission) and APRA (Australian Prudential Regulation Authority) intervention, that it is increasingly difficult for investors to add to their property portfolio, under a mix of DTI (debt-to-income) hurdles and changes to the way investment property expenses are assessed,” he said,

Following regulatory pressure, lenders have steadily been applying stricter criteria when assessing an investor’s ability to service a loan. The clearest example of this was ASIC’s 2019 revision to APG 223, which, without getting too technical, coerced lenders into applying larger serviceability buffers, therefore reducing borrowing capacity.

“Logic says that this would cool demand, but if you look at the housing market under a microeconomic lens, it also hampers the supply of property,” said Cross.

For many property developers, securing finance for new projects hinges on achieving sufficient presales – most of which are purchased by investors.

“If investors can’t buy, developers can’t presell, can’t raise finance, and can’t build,” said Cross.

He used a 12-unit complex as an example: If half the units would typically go to investors and the other half to owner-occupiers, restricting investor activity means all 12 homes remain unbuilt, directly reducing housing supply.

This tightening supply keeps property prices elevated and shrinks the pool of rental properties, driving rents higher too.

“If you want to balance out the housing market, there realistically should be a reduced level of incentive to first-home buyers, and reduced disincentives to investors," Cross said. "Let the market be free.”

A case of wishful thinking?

Cross’s thesis, while compelling, is unlikely to attract much sympathy in the wider public.

If anything, the current government is on track to place further restrictions on property investors via an overhaul of the self-managed super fund (SMSF) tax system. There have even been whispers that the Labor party is mulling negative gearing reforms, though these whispers currently remain unsubstantiated.

There is also the common viewpoint that price caps on first-home buyer incentives actually need to be raised to align with the pace of house price growth, although this is a more prevalent discussion in capital city housing markets.

On the bright side for the likes of Rod Cross, Labor under Prime Minister Anthony Albanese and Housing and Cities Minister Clare O’Neil appear open to cutting red tape.

Albanese last month conceded that it’s “too hard” to build a house in Australia, in direct reference to the burden of red tape.

O’Neil recently told the Australian Financial Review that “all three levels of government, over a 40-year period, have created a thicket of regulation which is giving the distinct impression to builders around the country that we don’t want them to build any more homes. And that is not the case”.