The Housing Affordability Problem

In early 2025 the Reserve Bank of Australia (RBA) cut interest rates in February and May, with more cuts expected. Lower rates mean lower repayments, which sounds like good news.

Update (late 2025): APRA has since acted. On 27 November 2025 it announced debt-to-income (DTI) limits from 1 February 2026: banks can make no more than 20% of new owner-occupier loans, and 20% of new investor loans, at six times the borrower's income or more. Loans to buy or build a new home are exempt. The 3% serviceability buffer, in place since October 2021, still applies. Check APRA's website for current settings.

*But there's a catch: when borrowing gets cheaper, more people, especially investors, rush into the market.*

That extra competition pushes house prices up, leaving everyday buyers, especially first-home buyers, struggling to keep up.

History shows it. After the Global Financial Crisis (GFC), when rates fell sharply, house prices rose about 20% in two years, as investors armed with cheap loans outbid owner-occupiers.

The Albanese government has promised an "ambitious housing agenda", including 100,000 homes for first home buyers and funding for roads and water connections to speed up building. Boosting supply matters, but the government is also boosting demand.

The 5% deposit scheme and shared equity schemes (where the government co-invests up to 40% of a home's price) make it easier to buy, but they also add more buyers to a market already under pressure.

The result? Without balancing supply and demand, these policies risk pushing prices even higher, making it even harder for first-home buyers to get a foot in the door.
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Lower interest rates might sound like a win, but they can turbocharge prices—especially if demand isn’t carefully managed.

Why Interest Rates Alone Can't Fix Affordability

Lower rates reduce repayments, but there's more to the story.

When rates fall, buyers can borrow more. More borrowing power means more people bidding on the same homes, which drives prices up.

The effect is simple: when there’s more money in the market, sellers can demand higher prices. It’s basic supply and demand.

After the GFC, when the RBA cut rates, prices jumped about 20% in two years. When rates rose a little between 2009 and 2011, prices fell about 4%. The pattern is clear: falling rates fuel price rises.

Here's where it gets interesting. From 2017 to 2019, prices fell about 9% even though the RBA held rates steady. Why? The Australian Prudential Regulation Authority (APRA), which supervises the banks, had tightened lending to investors and on riskier loans, so investors couldn't flood the market with cheap money.

So affordability isn't just about rates; it's also about who gets to borrow. Give investors free rein when rates drop and they'll outbid owner-occupiers.

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Don’t rely on falling rates alone to make housing affordable. Without rules to limit investor borrowing, prices will keep rising—locking out first-home buyers.

Macroprudential Policies: A Lever That Worked

So what did APRA do? It used macroprudential policy: lending rules aimed at the stability of the whole financial system, not just individual banks.

A fancy term for rules that make it harder for investors to borrow too much, too fast.

In the mid-2010s APRA saw investors piling into housing and introduced a few key measures:

  • Investor loan growth cap: From December 2014, banks were told to keep investor lending growth below 10% a year.
  • Serviceability buffers: Banks had to test whether borrowers could still repay at a rate at least 2 percentage points above the actual loan rate.
  • Interest-only cap: In 2017, APRA capped interest-only loans at 30% of new lending, and banks responded by charging investors and interest-only borrowers up to 1% more.

It worked. Investor lending dropped and, from 2017 to 2019, prices fell about 9% despite steady interest rates.

The logic is clear: when borrowing becomes more expensive for investors, they pull back. That reduces competition for homes, giving owner-occupiers a better shot at buying.
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Macroprudential rules are a practical way to cool the market, ease price pressure, and give first-home buyers a fighting chance.

What Happened When APRA Pulled Back?

APRA started easing those limits in 2018, on the basis that the financial system had stabilised.

Then COVID-19 hit in 2020 and the RBA cut rates to record lows. With the earlier limits gone, investors jumped back in on cheap money.

The result? House prices surged about 32% in two years. It wasn't until mid-2022, when the RBA started raising rates, that the market cooled.

This pattern reinforces a key point: without solid checks in place, falling rates can turbocharge demand—especially from investors—leading to rapid price hikes.
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The lesson is clear: macroprudential controls need to stay in place as long as interest rates are low, or prices risk spiralling out of control.

The Case for Renewed Macroprudential Controls

We're facing a familiar risk: rates falling, borrowing getting cheaper.

Without intervention, this could set the stage for another surge in housing prices, driven by investors snapping up properties.

There's a strong case for bringing back the kind of controls that worked before. APRA could:

  • Reinstate investor lending caps: limit how fast banks can grow investor lending each year.
  • Raise borrowing buffers: test borrowers at a bigger margin above the actual rate.
  • Target interest-only loans: make riskier loan types, mostly used by investors, harder to get.

The tools already exist in APRA's macroprudential policy framework, and APRA has now used one of them (the DTI limits in the update above).

The real question is whether the government will give APRA the green light to act—and whether the political will exists to put homeowners first.

Used well, these controls help the people who need it most: those buying a home to live in, not a second or third investment property.

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Bringing back smart lending rules isn’t just policy—it’s about fairness. Renewed controls can keep housing within reach for everyday Australians, even when rates drop.

Where Policy Falls Short

APRA's tools work, but they won't fix affordability on their own. There's no magic bullet, and the macroprudential argument tends to sidestep other obvious levers like negative gearing and the capital gains tax (CGT) discount.

Here's the reality:

  • Negative gearing and the CGT discount: These tax breaks make investing more attractive and tilt the playing field against owner-occupiers, especially first home buyers. The government has avoided changing them.
  • Mixed messages: The government promises more supply through building targets and infrastructure, then boosts demand with the 5% deposit scheme and shared equity. Those demand boosts risk pushing prices up and cancelling out the new supply.
  • Convenient lever: Macroprudential policy is attractive partly because regulators can use it without new legislation. That doesn't make it the only, or the best, answer.
This bias may stem from political caution or a desire to avoid tough reforms that could upset investors or property owners.

Systemic problems need comprehensive solutions, not just regulatory tweaks or announcements made for the headlines.

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Relying solely on APRA’s tools while ignoring tax reforms and demand-side pressures leaves a big gap. Balanced, courageous policies are needed to truly improve affordability.

What It Means for Homeowners and Buyers

If lending isn't kept in check, investors can flood the market again, driving prices up and pushing everyday buyers out. That's real dollars and real dreams, not just a policy debate.

With easy access to cheap money, investors can outbid owner-occupiers. First home buyers find it harder to get in, and existing owners face more competition and higher prices when they upgrade.

Used properly, APRA's tools can shift the balance, so falling rates help people buying a home to live in, not just those building portfolios. Note too that APRA's new DTI limits exempt loans to buy or build a new home, so if you're building, check how your lender applies them.

This isn’t about punishing investors; it’s about creating a fairer system where housing remains accessible to all.

Conclusion: A Call for Balanced Reforms

The evidence is clear: macroprudential policies, like limiting investor lending or tightening rules on high-risk loans, can slow runaway prices and give first home buyers a fighting chance. We've seen it work before.

But relying solely on APRA’s levers won’t be enough.

But real affordability needs more than one lever. Boosting supply matters, and so does the demand side, including negative gearing, the CGT discount and the policies that encourage speculation.

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Let’s prioritise homes for people, not profits, or risk locking out a whole generation.

FAQs: Homeowner Questions Answered

1. What are macroprudential policies and why do they matter?
Macroprudential policies are rules and regulations designed to maintain financial stability, like limits on investor lending. They matter because they can control excessive demand and keep housing more affordable.

2. How did APRA's past policies affect house prices?
After APRA tightened lending rules (2014 to 2017), house prices fell about 9% between 2017 and 2019, even though interest rates were steady. It became harder for investors to flood the market.

3. Why are falling interest rates a concern for housing affordability?
Lower rates make borrowing cheaper, which can lead to more buyers—especially investors—competing for homes. This can push prices higher, making it tougher for first-home buyers to enter the market.

4. What’s the difference between owner-occupier and investor loans?
Owner-occupier loans are for people buying a home to live in, while investor loans are for those buying to rent out or sell later. Investors often compete with first-home buyers, driving up prices.

5. How does negative gearing and CGT discount impact the market?
Negative gearing and CGT discounts reduce the costs and increase the returns for property investors, making investment more appealing and adding pressure to housing demand and prices.

6. Why might the government hesitate to implement tougher policies?
Restricting investor benefits or tightening lending rules can be politically unpopular and upset key stakeholders, including investors and large property owners.

7. Can macroprudential policies really stop house prices from rising?
They can’t stop price growth entirely but can slow it down by limiting excessive investor activity, helping to keep housing within reach for owner-occupiers.

8. What can homeowners and buyers do?
Keep an eye on lending rules, market trends and government policy, and get independent financial and lending advice before you commit.

9. Are there risks to over-restricting investment lending?
Yes. If restrictions are too tight, it could reduce housing supply and investment in rental properties, potentially leading to shortages and rent increases.

10. How might future interest rate changes impact housing affordability?
Further rate cuts could fuel demand and push prices up if unchecked. Smart macroprudential policies can ensure that these cuts benefit genuine home buyers instead of investors.

Further Reading

Housing Policy Reform in AustraliaAustralia’s housing isn’t just bruised; it’s mis-managed. Endless policy swaps, siloed agencies, and blind faith in markets hit homeowners hard. Here’s what’s broken, how to fix it, and why government can’t be perfect—but must still do better.Why Canberra Needs Deficits – and Hot Property PricesMoney is just an IOU, so every federal surplus must come from our pockets. Modern Monetary Theory (MMT) shows why Canberra keeps the budget in the red and nudges house prices ever higher to shore up stamp duty, CGT and land-tax flows. Here’s how it works.Using Super for Home Deposits: What Happens Next?Find out what a recent report says about using super for a house deposit. Could this policy make buying a home easier—or just push prices higher? Discover the facts, the forecasts, and what it all means for you.Investing vs. Buying a New Construction Home: Pros and ConsDeciding between investing in real estate or buying a new construction home can be challenging. In this article we break down the pros and cons of each option, including financial considerations, potential challenges, and historical performance. Learn how to make an informed choice.

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