A Statement by HIA’s Chief Economist, Tim Reardon
Lenders Mortgage Insurance (LMI) isn’t the worst housing policy, but this week’s announcement by the Minister for Housing, Claire O’Neil MP, will lower rental prices, increase the supply of homes, without increasing demand, leading to lower home price growth, sometime after the next Federal Election.
Why removing LMI will lower rents and home prices, in time.
When the Australian Government made it a requirement for First Home Buyers (FHB’s) to buy LMI (for those with less than a 20 per cent deposit) in 2000, it added costs to those seeking to buy a home. In 2025, the cost is typically around $25,000 for a FHB. This meant fewer new households could buy a home, as their deposit was insufficient, requiring them to save for longer to pay this additional cost. This meant that more households were renting and renting for longer, which in turn forces up rental prices, making it even harder to save to buy a home.
The secondary impact of LMI, is to even further reduce the supply of new homes. Over the medium to long term, around a third of all new homes are built by FHB’s. By reducing FHBs ability to gain a loan, it reduces the number of new homes commencing construction. With the supply of new homes impaired, and demand growing through population growth, home prices rise faster than they otherwise would, making it increasingly difficult for FHB’s to save a deposit.
The tertiary impact is that the higher rental costs, and reduced supply, begin to have a compounding impact on FHB’s and make it increasingly difficult for them to enter the housing market.
Overtime, these three effects from LMI costs on FHBs have made the housing shortage worse. It has lowered the home ownership rate and at the same time, increased returns to investors.
But what about the short term?
There can be no doubt, that at least in the short term, that this announcement will see home prices rise. Removing the requirement for LMI provides FHB’s with an extra $25,000 in their deposit and will see more FHB’s active in the market from 1 October 2025. At the same time the supply of homes is fixed. It takes at least six months to build a new home. Therefore a rise in demand, while supply is fixed will see home prices rise.
Furthermore, FHBs are not evenly distributed across the market. They are not typically looking to buy in affluent suburbs and will therefore have minimal or no impact on the higher end of the market. But, they are often purchasing in the same suburbs or types of homes as other FHBs, which means that the upward pressure on home prices for FHB’s will be tangible, in those markets and locations where FHBs are active. At least in the short term.
The question is, how long does it take for this short-term uplift in prices to be offset by the increase in supply that will lower those prices?
Treasury’s estimate is that this will take six years. HIA's estimate is that it will be a little more than 3 years. The reason for the difference of opinion between HIA and Treasury is due to differing assumptions. HIA contends that because the change in policy is permanent, it does not have the same ‘draw forward’ impact of HomeBuilder or other short term stimulus policies that would see new households form. Short term stimulus measures typically see the ‘Bank of Mum n Dad’ step in to the market to access once in a generation grant funding.
The removal of the LMI requirement however, is a permanent change that will see a more orderly return to market by FHB’s mostly responding to lower interest rates. Also, by moving the policy announcement forward three months, there is insufficient time for FHB’s to make a significant change to the timing of their home purchase decision.
The consequence of this difference in assumptions is that HIA estimates the short-term appreciation of home prices in FHB markets will be relatively small, and that these same markets are the ones that will see the fastest increase in supply, largely through detached homes in greenfields suburbs. Impediments to apartment construction at present will see a quicker response from detached supply.
Regardless of these assumptions, this is about time. More new home construction, fewer households renting and increased home ownership will all occur because of this policy announcement, eventually. It is also a decision that sees government taking a view on housing policy that extends beyond the next election, and for this, they should be commended.
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