The ‘Cap’ Effect: Why Lower-Priced Homes Are Outperforming the Market

If you’ve noticed that entry-level homes are disappearing faster than ever, you’re not imagining it. New data from Cotality reveals a growing "divergence" in the Australian property market, driven largely by the expanded Home Guarantee Scheme (HGS).Since the scheme’s price caps were expanded last year, homes priced below these limits have seen significantly stronger growth than their more expensive counterparts. Here is a breakdown of what’s happening and why.

The Numbers: A Tale of Two Markets
The December quarter of 2025 showed a clear split in momentum based on whether a property qualified for the 5% deposit guarantee:
Under the Price Cap: Values rose by 3.6%.
Above the Price Cap: Values rose by 2.4%.
This isn’t just a niche trend; it’s happening almost everywhere. Approximately 89% of regions (78 out of 88 analysed) recorded stronger growth for homes sitting under the scheme’s price caps.

The "Sydney Gap"
The most dramatic example of this trend is in Sydney. While the top end of the market is cooling, the entry-level is heating up:
Sydney (Under Cap): +2.3% growth.
Sydney (Above Cap): -0.1% (a slight decline).

Why is this happening?
Cotality Research Director Tim Lawless suggests three main drivers are pushing demand toward the "affordable" end of the ladder:
The Guarantee Incentive: The ability to secure a home with just a 5% deposit has sharpened focus on properties that fit the criteria. Some buyers even "brought forward" their purchases to get in before the competition intensified.
Serviceability Limits: With interest rates remaining elevated, many buyers simply can't borrow enough to reach the higher price brackets. This "forced" demand is funneling more people into the lower-priced segment.
The Investor Factor: It’s not just first-home buyers. Investors are increasingly active in this space, making up 41% of mortgage demand in Q3. They are targeting the same lower-priced properties for their higher rental yields and growth potential.

What This Means for You
For First-Home Buyers: Expect more competition. Properties priced just under the HGS caps are the "sweet spot" of the current market, meaning you'll likely face more rival bidders and faster price growth.
For Sellers: If your property sits comfortably under the regional price cap, you are in a high-demand position.
For Investors: The lower-priced segment is currently the engine room of capital growth, fueled by both government policy and borrower constraints.

The Bottom Line
The expanded Home Guarantee Scheme has done more than just help people into homes; it has effectively shifted the market's momentum. As long as serviceability remains tight, the "under-the-cap" market is likely to remain the most resilient sector of Australian real estate.