KR Peters Director Peter Nicolls will watch with interest the effect on land prices and developers' balance sheets of the latest government scheme to make housing more affordable for first home buyers.

In late November the Federal Government passed its Help to Buy legislation through parliament.

The scheme allows first home buyers to enter into an equity arrangement with the government with a deposit of as little as 2 per cent.

Income thresholds for the scheme are $90,000 for singles and $120,000 for couples. There are also caps on the amount that can be borrowed. ( see previous blogs)

And while Mr Nicolls agrees with the intention of the scheme, he is concerned it will have an inflationary effect on land prices.

He well remembers the first scheme introduced in the late '90s under which first home buyers received a $10,000 grant.

"At the time land in Pakenham was selling at $40,000. Within a couple of weeks every developed allotment in Pakenham had sold and land prices had increased to $60,000 per allotment," Mr Nicolls said.

"As more grants were introduced to assist homebuyers,  developers increased their land prices accordingly . A $25,000 government grant  would be matched by a $25,000 developer's increase."

As a result, governments ceased providing grants except for the first homebuyers $10,000 grant.

"With the Help to Buy Scheme the government is taking an equity of up to 40 per cent on new homes and 30 per cent on established. In my opinion , if the government ceased all the schemes developers would struggle," Mr Nicolls said.

"This is evident in today's market where developers are giving up to $40,000 genuine rebates to generate sales.

"The real problem is that land prices increased by more than 30 per cent in a two year period. The cost to construct a dwelling also increased by approx 30 per cent in the same period."

To further exacerbate the problem, with interest rates staying stubbornly high homebuyers  are unable to obtain finance.

Mr Nicolls is hopeful the property market will see a correction in 2025 which is good news for buyers.

"Developers will hit the wall caused by lack of sales, expensive land tax, high interest rates, rates, council contribution fees and delays in obtaining all the relevant permits," he predicted.

"With economists predicting a further 5 per cent decrease in property values, effectively this equates to approximately $25,000 price reduction on the land component."