The First Home Owner Grant: Subsidising Higher Prices Since 2000

A Policy That's Been Failing First Home Buyers for 25 Years

If you wanted to design a housing policy that looked like it helped first home buyers while actually making their situation worse, you'd be hard-pressed to do better than the First Home Owner Grant.

Introduced by the Howard government in July 2000 to cushion the blow of the GST on new housing, the FHOG has since paid out over $30 billion in grants across federal and state programs. It's been expanded, renamed, boosted during downturns, and quietly trimmed - but never abolished. Both Labor and the Coalition have maintained and extended versions of it at various points.

The problem? Almost every serious economist who has looked at it says it doesn't work as advertised.

What Is the First Home Owner Grant?

The FHOG is a one-off cash payment made to eligible first home buyers purchasing or building a new home. It is administered by state and territory governments but funded partly by federal arrangements.

The amounts vary by state and have changed repeatedly over the years:

Note that the ACT - run by Labor and the Greens - actually abolished its version of the grant and replaced it with stamp duty reform. More on why that matters shortly.

The Problem: Grants Push Prices Up

Here's the core issue, and it isn't complicated: when you give buyers more money to spend in a market with limited supply, sellers capture the benefit - not buyers.

This is basic economics, and it's been documented repeatedly in the Australian context.

A landmark study by the Reserve Bank of Australia (RBA) found that the First Home Owner Grant boost introduced in 2001 - which temporarily doubled the grant to $14,000 for existing homes - led to a measurable increase in house prices, particularly at the lower end of the market where first home buyers compete. The grant was essentially capitalised into prices within months.

Research by economists Saul Eslake, Brendan Coates at the Grattan Institute, and numerous academics has reached the same conclusion over and over:

• Demand-side subsidies in a supply-constrained market inflate prices
• First home buyers may temporarily feel better off, but the benefit evaporates as prices adjust upward
• The grants disproportionately benefit vendors and, in the new build market, developers
• They can also pull forward demand, creating mini-booms followed by slowdowns

The Grattan Institute has described demand-side housing subsidies as "a transfer from taxpayers to vendors and developers, dressed up as help for first home buyers."

Who Actually Benefits?

If first home buyers aren't the main beneficiaries, who is?

• Property developers and volume home builders, who can price new builds knowing a grant is baked into buyer budgets
• Existing landowners, whose properties appreciate as more money chases the same stock
• State governments, who collect stamp duty revenue from higher transaction prices
• The construction lobby, one of the most politically connected industries in Australia

It's worth noting that the FHOG in most states is now restricted to new builds only - which is a telling detail. This isn't primarily a first home buyer policy. It's a construction stimulus policy with first home buyer branding.

Why Does It Persist?

If the evidence is this clear, why hasn't the policy been scrapped?

The answer is political, not economic.

The FHOG is enormously popular in the short term. A young couple receiving a $30,000 cheque from the Queensland government feels genuinely helped. The fact that the house they bought was $30,000 more expensive because of that grant is invisible to them - it happened before they signed the contract.

Meanwhile, the property industry - developers, real estate agents, construction companies - has strong incentives to lobby hard for these grants to continue. They donate to political parties. They employ people in marginal electorates. They run advertising campaigns.

The voters who are harmed by the policy - renters priced further out of the market, future first home buyers, taxpayers - are diffuse, disorganised, and often don't even know they're being harmed.

This is a textbook example of concentrated benefits and diffuse costs: a small group gains a lot and fights to keep the policy, while a large group loses a little each and never mobilises against it.

What Should Be Done Instead?

Almost every housing economist in Australia agrees the solution to housing affordability is supply. More homes, more density, faster approvals, unlocked land. The ACT's approach - abolishing the FHOG and reforming stamp duty into a broad-based land tax - is consistently cited as better policy.

Other evidence-based alternatives include:

• Meaningful zoning reform to allow more housing in inner and middle suburbs
• Replacing stamp duty with annual land value taxes (which don't distort buying decisions)
• Direct investment in social and affordable housing
• Reforming negative gearing and the capital gains tax discount, which subsidise property investors at the expense of owner-occupiers

None of these are politically easy. All of them would create winners and losers in ways politicians find uncomfortable. So instead, we get another grant.

This Is Exactly Why Direct Democracy Matters

Here's the thing: if ordinary Australians were asked directly whether they'd prefer a $10,000–$30,000 grant that economists say inflates prices, or genuine supply-side reform that might actually make housing affordable - the answer might look very different from what our elected representatives deliver.

The FHOG persists not because voters demand it, but because the political system rewards the interests of those who fund campaigns and lobby ministers. It's a policy designed to look like it helps people while actually serving a different constituency entirely.

At Direct Democracy, we believe Australians deserve more than the illusion of being helped. Members vote directly on policy positions, and elected representatives follow those instructions - not the instructions of property industry donors.

Want a say in Australia's housing policy? Take our policy quiz to see where you stand, or join the party and vote directly on the issues that affect your life.

[Join Direct Democracy →](https://directdemocracy.com.au/join)