By Jacob Shteyman and Andrew Brown in Canberra

A scheme allowing more first home buyers to enter the property market may be driving up house prices.

A report released on Thursday by Cotality found homes on the lower end of the property market eligible for the federal government’s five per cent deposit scheme recorded stronger price growth than higher-priced houses.

In the first six months after changes were made to expand the scheme, the price of eligible homes rose by 6.7 per cent, compared with 3.6 per cent for other properties.

Under the scheme, first home buyers can purchase eligible properties under a price cap with a five per cent deposit, with the federal government acting as a guarantor.

The biggest price gap was in Sydney, where homes below the price cap rose by 4.1 per cent, while those above the limits by 1.1 per cent.

All capital cities had higher growth in prices for homes below the price caps with the exception of Canberra, where the increase was the same at 3.6 per cent.

Cotality said anticipation of increased competition and price pressure after the expansion of the scheme in October was largely to blame.

It comes as expectations of work the building industry expects to complete has tumbled as a result of the war in Iran, in a sign the pipeline of new homes is set to shrink.

Expectations of forward work schedules decreased in every state and territory in March, the Property Council found in its quarterly survey of industry sentiment on Thursday.

It’s another setback to the National Housing Accord target of 1.2 million new homes by mid-2029.

State and federal governments have put increasing supply at the centre of their push to make housing more affordable.

Industry confidence was key to new supply, said Property Council chief executive Mike Zorbas.

“With costs high and confidence fragile, even relatively small increases in uncertainty can delay or stall projects before construction begins,” he said.

Since the Middle East conflict shut the Strait of Hormuz and disrupted global oil supplies, diesel prices have skyrocketed and costs of building materials, such as PVC pipes, have soared as much as 36 per cent.

Confidence levels fell by 19 index points to 104 – the largest quarter‐on‐quarter decline since June 2022 – according to the survey of 435 property developers, real estate agents and service providers.

Mr Zorbas said mooted changes to rein in property investor tax concessions increased uncertainty among developers and would reduce project feasibility.

But Jocelyn Martin, managing director of the Housing Industry Association, said reducing the capital gains tax discount for existing properties, while keeping a more generous concession for new builds, would encourage new supply.

“Of the current pool of investors, we know that about 80-odd per cent of them are buying existing homes,” she told a parliamentary inquiry on Wednesday.

“So perhaps changing the balance between new and existing would actually encourage some investors into new homes.”

Another way to boost supply was to lower how long it takes and how costly it is to build new homes by improving the building sector’s productivity, which has fallen by 21.5 per cent in just over a decade, said Master Builders Australia policy director Melissa Byrne.

Centre for Independent Studies chief economist Peter Tulip and Grattan Institute senior associate Matthew Bowes both argued further easing zoning and planning rules to allow denser housing would significantly increase productivity.

Another productivity improvement could be achieved by reforming occupational entry regulations, which prevent skilled workers from entering the country or moving between borders, Deloitte Access Economics partner David Rumbens argued.

“These barriers constrain the labour market’s ability to direct people to where they are needed most, restricting competition and weighing on productivity,” he said.