As part of its broader approach to housing affordability, Australia helps first-time buyers enter the market faster through its Home Guarantee Scheme, with programs tailored to different types of buyers. In part one, we broke down the scheme’s key programs and potential market implications. In part two below, we examine whether a similar approach could work in Canada.
Overview
The Australian Home Guarantee Scheme is designed to help people who face barriers to home ownership due to high deposit requirements but are able to meet mortgage serviceability requirements. For first-time home buyers with a 5 per cent down payment, the government provides a guarantee on up to 80 per cent of the loan value, removing the need for mortgage insurance.
The Australian government identified “[t]he biggest constraint on housing affordability has become the time it takes to save a sufficient deposit, rather than the ability to service a mortgage. As a share of income, the average first home buyer deposit has risen significantly in recent years, from below 70 per cent of average annual household income in 2010 to over 80 per cent in 2021. Consequently, the average time it takes the average first home buyer in capital cities to save a deposit has increased by approximately 25 per cent over the past decade. For many prospective buyers, it takes approximately 10.7 years in capital cities and 9.1 years in regional areas to save for a deposit.”
Scheme Impacts
House Prices
The Home Guarantee Scheme effectively boosts the purchasing capacity of qualified buyers, similar to the more widely used first home buyer grants. The government estimates it will increase average home prices by just 0.5 per cent over six years.
The insurance industry takes a more cautious view. A study by Lateral Economics for the Insurance Council of Australia notes that support for first-time home buyers that merely accelerates or adds to demand, without a corresponding increase in supply, is likely to drive up house prices, offsetting much of the intended benefit. In such cases, gains would flow to existing property owners who sell their homes, as well as to developers and builders, rather than to buyers. One study estimates the program could push prices up by as much as 6.6 per cent, largely due to the short-term inelasticity of housing supply. This increase would risk putting homeownership further out of reach for many low-income first-time buyers.
Financial Cost
Although the scheme does not involve direct government cash payments, the guarantees create a contingent liability for the government in the event of a default if there is a shortfall between the property sale proceeds and the outstanding loan amount. One study estimates this liability could reach $62 billion. While there have been no defaults to date, the Australian Parliamentary Budget Office estimates a default rate of 0.30 per cent. The key concern is the potential recovery rate on these high ratio loans, since loans above 80 per cent loan-to-value (LTV) typically carry a higher risk of loss to the insurer.
Another consideration is that the guarantee provides only “top-down” coverage, protecting just 15 per cent of the property value. In the event of a significant economic downturn and a sharp decline in the real estate market, banks could be exposed to losses.
Impact on the LMI Industry
Mortgage insurance in Australia is similar to the Canadian market. It is typically a life-of-loan product, meaning coverage lasts for the full term of the mortgage and protects lenders against borrower default. The two main providers are Helia and QBE LMI.
The Housing Loans Insurance Corporation (HLIC) was established by the Australian Government in 1965 to provide Lenders’ Mortgage Insurance (LMI). It was introduced as a way to help more Australians purchase homes with smaller deposits. In 1997, GE purchased HLIC from the Australian Government and began GE Mortgage Insurance Co in Australia. Genworth Financial was spun off from GE in 2006, with GE’s mortgage insurance businesses included in the split. In 2022, Genworth sold its Australian mortgage insurance business to institutional investors, and the company was rebranded as Helia upon listing on the Australian Securities Exchange (ASX).
QBE LMI was previously known as PMI, part of a US-owned mortgage insurer, and was acquired in 2008 after the financial crisis. Smaller LMI providers include some that are owned by the lenders they insure. For example, CBA, Westpac (whose LMI business was recently acquired by Arch), St. George, ING Bank and ANZ all offer their own LMI products. As captive insurers, these banks provide mortgage insurance coverage only for their own loan portfolios.
The scheme could reduce the profitability of the LMI sector to the extent that a participant exits the market. In that event, the cost of LMI contracts may increase, and some lenders might instead increase the price of loans for high-LTV borrowers as a replacement for LMI – something some lenders already do for loans with LTVs up to 85 per cent.
The Insurance Council-commissioned study suggests that the LMI industry has already been significantly affected by the earlier versions of the guarantee: “only 1 in 10 FHBs [first-time home buyers] now use LMI, down from levels of 3 in 10 before its introduction. The expanded HGS [Home Guarantee Scheme] is expected to reduce annual LMI activity further, potentially leading to significant rise in LMI premiums due to higher fixed costs being spread over fewer policies.”
Observations
The early version of Australia’s Home Guarantee Scheme was a targeted initiative, limited to 10,000 applicants per year. There isn’t enough data available to determine if the lack of defaults in its early days was due to its narrow product scope or to the overall strength of the labour and housing markets.
The broader program is likely to create price pressures in the housing market and could disrupt the mortgage insurance industry. Unlike in Canada, mortgage insurance is not mandatory in Australia, which could lead to a reduction in overall insurance activity.
Could this Program Work in Canada?
Since the federal government already provides mortgage insurance as well as guarantees for the two private insurers, upsetting the structure of this industry could have major financial consequences. Any program would need to be carefully designed in terms of size and scope.
If Canada were to introduce a similar scheme, it could affect insurers and potentially further concentrate mortgage activity among the major banks. Mortgage brokers tend to dominate the first-time home buyer market, while alternative mortgage lenders rely on the Canada Mortgage Bond (CMB) program for funding. Because CMB-backed products are not insured, these lenders would not be eligible, giving banks an advantage in this segment.
In my view, a program with the scope of Australia’s Home Guarantee Scheme makes no sense for the Canadian market, as it would likely drive up home prices. However, there may be scope for a more limited program targeted specifically to the condo market.
The GTA condo market has been floundering, with approximately 31,000 new units expected to be completed in 2025, adding to an already oversupplied segment. Similar trends are evident in Vancouver and other major Canadian centres.
The government has focused on non-market housing, such as subsidized and co-op units, to support rental supply. However, without contributions from the condo market, the rental supply gap could widen. A recent Urbanation study projects that the GTA rental supply gap could double over the next 10 years.
While purpose-built rentals are expected to provide most of the new rental supply over the next decade, condo investors are unlikely to contribute significantly to the rental stock. Encouraging renters to move into condos could help close this supply gap.
In the first six months of the year, CMHC data show 6,106 condo starts in the Toronto region. In comparison, industry research groups Urbanation and Zonda report 1,950 and 2,300 condo starts, respectively. The difference reflects how “starts” are measured: CMHC counts a start when footings are poured, while Urbanation and Zonda track when excavation begins. In the current market, this discrepancy highlights how quickly condo development is slowing.
A targeted guarantee could help first-time buyers purchase newly built condos, potentially helping to stabilize the condo market and move some projects off the cancellation list. The remaining challenge would be how borrowers could meet stress test requirements to qualify for loans.[1]
While the government could let the market adjust on its own, the existing housing supply gap raises questions about whether it can afford to stay on the sidelines.
[1] Australia has a stress test, but banks have flexibility in setting the stress rate.
Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.
