Housing affordability: Do we actually want it?
Housing affordability isn’t one problem but three hurdles, writes Simon Kuestenmacher.
Housing affordability is one of those phrases everyone uses but few people define.
Politicians across parties agree that housing should be more affordable. Let’s figure out what that means.
The most common affordability measure is the price-to-income ratio.
Organisations like Demographia popularised the simple comparison between the median house price and the median household income.
If a typical home costs three times the typical income, housing is considered affordable. If it costs more than eight annual incomes, the market is considered severely unaffordable. That’s most of Australia now.
It’s a useful metric because it is simple and comparable across countries. But it ignores two critical factors – deposits and interest rates.
A second way to measure affordability is the deposit hurdle. In many markets, the hardest part of buying a home is no longer servicing the mortgage but saving for a comically large deposit.
Organisations such as the Grattan Institute measure how long buyers must save to secure a 20 per cent deposit. An Australian median household now needs to save well over a decade for a median house.
A third measure looks at mortgage repayments relative to income.
In Australia, a common benchmark is that housing becomes financially stressful when repayments exceed 30 per cent of household income. The Australian Housing and Urban Research Institute, for example, uses this threshold to identify households in housing stress.
Some economists go further and measure affordability through the share of homes a median-income household could afford.
In the USs, the National Association of Home Builders calculates a “housing opportunity index” estimating the proportion of homes on the market that are affordable to the typical household.
You might like
Finally, there is the residual income approach, used in international housing research. Instead of focusing on ratios, it asks a simple question – how much money does a household have left after paying housing costs?
Combining these metrics, housing affordability isn’t one problem but three hurdles. You must save the deposit, qualify for the loan and service the mortgage. If one hurdle is out of reach, home ownership remains out of reach.
What can government do to make housing more affordable?
The first lever is income growth. In an economy with more high-paying jobs, more people find housing easier to afford. Higher wages increase borrowing capacity and make repayments less painful relative to income.
Governments can influence this through education policy, migration settings, industry policy and economic reform. A richer population tends to experience fewer affordability pressures, even if house prices remain high in dollar terms.
The second lever is house prices. To make housing more affordable, prices don’t necessarily need to fall, but they must grow slower than incomes.
Governments can push for more housing supply by expanding apprenticeships in construction trades or directing migration towards construction jobs. They can reduce barriers to development, fund infrastructure that opens up new housing areas, change settings such as capital gains tax, negative gearing or stamp duty or even introduce public developers that build housing directly.
Governments could also stop policies known to drive up prices. First-home buyer grants, for example, increase purchasing power without increasing supply, thereby pushing prices higher.
The third lever is interest rates. A household borrowing $800,000 at 1 per cent interest faces dramatically lower repayments than the same household borrowing at 7 per cent (in fact the 7 per cent loan has about twice the monthly repayment costs).
Lower interest rates increase borrowing capacity and reduce mortgage stress. Of course, interest rates are indirectly set by the independent Reserve Bank of Australia rather than by governments directly.
Instead of blaming the RBA for raising rates, governments could do their bit to lower inflation by controlling spending and dampening consumption, including through changes to GST rates.
Governments can make housing more affordable. But there is an uncomfortable political reality hiding behind the pleasant term “affordability” – improved affordability means house prices being lower than they otherwise could be.
For aspiring homebuyers and young people, lower prices are welcome news.
From the perspective of many stakeholders, anything but rising house prices is a disappointment.
In Australia three-quarters of voters own the home they live in. Politicians can ignore the non-voters, who are more likely than voters to be renters.
The rental stock is supplied largely by roughly 2.5 million small “mum and dad” landlords who want their investments to rise in value.
States also like higher house prices as property-related taxes make up a large share of their revenue. Australian banks make juicy profits handing out mortgages.
Bigger and longer mortgages lead to happy banks. Property developers, mortgage brokers, tradies and other industries also profit from higher house prices.
Stay informed, daily
At the moment, most stakeholders and voters benefit from rising prices. That makes housing policy politically delicate. Paying lip service to affordability is easy.
You can promise an impossibly ambitious housing target. You can promise to cut migration in the name of affordable housing, conveniently without mentioning how you plan to fill the resulting workforce gaps or rebalance a federal budget that relies heavily on income tax.
You might even introduce more first-home buyer schemes and hope nobody notices that they make housing more expensive while also being inflationary.
Government, if actually interested in making housing more affordable, should therefore pursue a soft and transparent long-term strategy: Ensure that house prices consistently grow at a lower rate than incomes.
If incomes rise faster than house prices for long enough, housing gradually becomes more affordable without requiring nominal price falls.
Economists sometimes call this the “slow repair” strategy. It is politically safer, but it requires patience.
Even if you believe housing should be radically cheaper and dream of spectacular price declines of, say, 50 per cent, any rapid downward price movement would have unintended consequences.
A sudden collapse in house prices would ripple far beyond the property market. Millions of recent buyers would fall into negative equity, meaning they owe the bank more than their home is worth, increasing the risk of mortgage defaults.
Since residential mortgages make up the majority of Australian bank lending, a surge in defaults would pressure the banking system and likely force government intervention.
Households would feel dramatically poorer as trillions in housing wealth evaporate, consumer spending would fall, and the broader economy could slide into recession – that’s the negative wealth effect in action.
Construction activity would stall, unemployment would rise, state governments would lose stamp duty revenue, and the share market, dominated by bank stocks in Australia, would likely fall, dragging down superannuation balances and hurting retirees.
Housing affordability won’t improve overnight. If we improve it at all, it will be a matter of years or, more likely, decades until wage growth persistently outpaces house price growth and turns today’s severely unaffordable market into something more manageable.
That requires a clear definition of affordability – deposit, loan qualification and mortgage serviceability.
It also requires discipline to pursue policies that move those levers in the same direction – stronger real incomes, faster and easier supply and lower inflation so interest rates can eventually fall.
Affordability is not a slogan. It’s a choice and it’s a long, slow game.
The 2026 federal budget was the first hint at what I would argue is the direction the government is moving the housing market.
The intention appears indeed to be making housing more affordable slowly. Labor’s calculation might be that most voters will tolerate their property values growing at a slightly slower pace, while younger voters finally see a reason to believe prices can move in their favour.
The Coalition’s budget response stopped treating affordability as a pure construction problem and started treating it as a population-capacity problem by linking net migration to dwelling completions.
It also earmarked $5 billion for infrastructure to unlock more supply. In political terms, it is an attempt to speak to younger renters and first-home buyers without explicitly promising lower house prices.
Demographics are on Labor’s side here. With every election cycle, three years of old homeowners fall off the electoral roll while three years’ worth of pessimistic young people reach voting age.
Providing these young people with optimism about their future will be crucial for the survival of both major parties. Making housing truly more affordable must be the central effort if the major parties want to be relevant in six or seven elections.
Simon Kuestenmacher is a co-founder of The Demographics Group. His columns, media commentary and public speaking focus on current socio-demographic trends and how these impact Australia. His podcast, Demographics Decoded, explores the world through the demographic lens. Follow Simon on Twitter (X), Facebook, or LinkedIn.
Want to see more stories from InDaily Qld in your Google search results?
- Click here to set InDaily Qld as a preferred source.
- Tick the box next to "InDaily Qld". That's it.
