Under the eligibility rules, outlined in Treasury post-Budget notes, people who get the housing grants will be forced to buy a house with a value in the lowest 25% of homes in their town, area or city.

In Auckland City or the North Shore, the Treasury notes say, that would be a home costing $400,000 or less, while in the Queenstown Lakes district, it would be a home worth $300,000 or less. The measure is designed to stop people in cheaper areas using KiwiSaver to buy bigger homes than the government thinks is reasonable.

Under the KiwiSaver scheme, to be introduced on July 1, there will be a first home ownership grant of $1000 a year for each year of saving. That is capped at $5000 per person, so a couple could get $10,000.

The first home deposit subsidies will be paid out in 2010 because only KiwiSavers who have been saving at least 4 per cent of their gross salary into KiwiSaver for three years will be eligible.

For households and families with three or more KiwiSavers clubbing together to buy, the income cap will be $140,000. The levels would be reviewed in 2009, and the property price caps would be reviewed annually.

Property investor Andrew King said the stipulation that homes be at the bottom end of the market appeared to be forcing relatively well-earning couples to downsize their aspirations with the intention of leaving them enough left over to save into KiwiSaver.

“I guess they are trying to reduce the quality of the houses we live in,” said King.

“They feel the homes we live in are too grand and that we spend too much money buying them.”

A spokesman for Finance Minister Michael Cullen said the scheme would provide targeted assistance to help those who struggled most to buy their first home. “This is a helping hand, getting them into their first home, but not necessarily the most desirable home in their life.”

On top of the government handout to buy a first home, he said tax breaks and employer contributions under the KiwiSaver scheme meant people will also have more money to save for a house. Those who failed to meet the subsidy’s criteria could still draw on their KiwiSaver money to buy a home.

To get the housing grant, a KiwiSaver must intend to live in the house they buy for six months or more; this is designed to stop people buying an investment property in one area, pushing up local house prices, and renting in another.

Those who flout the rules will have to repay the money and could be penalised.

The $100,000 cap indicates just how unaffordable the housing market is.

Statistics New Zealand’s June 2006 income data showed the average 15-24-year-old earned just $24,180 before tax. The average 25-34-year-old earned $34,684 and the average 35-44-year-old earned $37,856.

But mortgage broker Adam Parore said there was something demeaning about making middle-income New Zealanders go cap in hand to the government for money.

“I think subsidies have their place in every society, but I don’t believe it’s something families with combined incomes of $100,000 to $140,000 need.

“Michael Cullen’s heart’s in the right place, but … It would be a whole lot easier if he’d just given them a tax cut and let them buy their home from their own money.”

Parore says the three to five year waiting period for the grant will do nothing for those locked out of the market now.

“The nature of the property market is working against the scheme. In five years prices will have moved even further away from first home buyers and that $5000 is going to be worth a lot less.”

Parore did not think the government was trying to force people into smaller houses by saying they had to buy cheaper homes.

“Even if an Auckland couple earning $99,999 got a $10,000 subsidy, had saved $15,000 for themselves and had $10,000 gifted by their parents, they’d still only be realistically able to borrow $400,000 more – making for a buying price of $435,000, which is not a lot higher than the limit the government has set.”

Even if people are ineligible for the grants, all first home buyers will be able to withdraw their own savings, and part of their employers’ contributions, from their KiwiSaver account to help pay the deposit on their first home after three years of saving, though they cannot touch the $1000 the government put in, or its weekly contributions. All members of KiwiSaver, including new home buyers, can channel half their contributions towards paying off their mortgage.