Macro Reforms for Housing Affordability: A Clearer Path

1. Introduction: The Housing Affordability Crisis

In early 2025, the Reserve Bank of Australia (RBA) cut interest rates in February and May. With more cuts expected later this year, borrowing money is set to get cheaper. For many of us, that might sound like good news—after all, lower rates mean lower mortgage repayments, right?

But there’s a catch: when borrowing becomes 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 us how lower interest rates have driven house prices sky-high. The last time rates dropped significantly after the Global Financial Crisis (GFC), house prices surged by 20% over just two years. This wasn’t just because there were more buyers; it was because investors, armed with cheap loans, were snapping up properties at prices owner-occupiers couldn’t match.

The Albanese government has promised an “ambitious housing agenda” to tackle this issue, including plans to build 100,000 homes for first-home buyers and invest in infrastructure like roads and water connections to speed up housing construction. While boosting housing supply is important, the problem is that they’re also encouraging demand.

Policies like the 5% deposit scheme and shared equity schemes (where the government co-invests up to 40% of a home’s price) make it easier for people 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.

2. Why Interest Rates Alone Can’t Fix Affordability

Many people assume that when interest rates drop, it’s easier for everyone to afford a home. While it’s true that lower rates reduce mortgage repayments, there’s more to the story—and it’s not all good news for everyday buyers.

When interest rates fall, buyers can borrow more. That extra borrowing power means more people are bidding on the same properties, which drives up house prices.

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

Let’s look at the numbers. After the GFC, when the RBA cut rates to stimulate the economy, house prices jumped 20% in just two years. When rates rose a little between 2009 and 2011, house prices actually fell by 4%. The pattern is clear: falling rates fuel price rises.

But here’s where it gets interesting. From 2017 to 2019, house prices fell by 9% even though the RBA held rates steady. Why? Because APRA—the Australian Prudential Regulation Authority—stepped in. They put restrictions on how much investors could borrow, forcing banks to tighten lending for high-risk loans. This meant that even though rates were low, investors couldn’t flood the market with cheap money.

This shows us that interest rates alone don’t determine affordability—it’s also about who gets to borrow. If investors are given free rein when rates drop, they’ll outbid owner-occupiers and push prices higher.

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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.

3. Macroprudential Policies: A Lever That Worked

So, what exactly did APRA do to slow down runaway house prices in the past? They used what’s known as macroprudential policies:

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

Back in the 2010s, APRA noticed that investors were flooding the housing market. To rein things in, they introduced a few key policies:

Investor Loan Growth Cap: In 2014, they told lenders they couldn’t grow their investor loan books by more than 10% each year.
Buffer Requirements: Banks had to assess borrowers’ ability to repay loans at rates at least 2% higher than the actual loan rate.
Interest Rate Hikes: In 2017, APRA made banks charge higher interest rates for certain types of loans. Investor loans and interest-only loans got the biggest hikes—up to 1% extra for investor interest-only loans!

These changes worked. From 2017 to 2019, the number of loans given to investors dropped, and house prices fell by 9% despite steady interest rates. This wasn’t just a coincidence; it was a direct result of APRA’s rules.

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.

4. What Happened When APRA Pulled Back?

After a few years of tighter controls, APRA started easing its restrictions in 2018. The thinking was that the financial system had stabilised, so it was time to loosen the reins. But this change had consequences.

Around 2020, when the COVID-19 pandemic hit, the RBA slashed interest rates to historic lows to support the economy. With APRA’s earlier restrictions no longer in place, investors saw an opportunity. They jumped back into the market, taking advantage of cheap borrowing.

The result? House prices surged by a staggering 32% in just two years. It wasn’t until mid-2022, when the RBA began increasing rates again, that the market cooled down.

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.

5. The Case for Renewed Macroprudential Controls

Looking at today’s situation, we’re facing a familiar risk. The Reserve Bank is expected to cut interest rates even further in 2025, making it cheaper to borrow.

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

To prevent this, there’s a strong case for renewing macroprudential controls—the kinds of measures that helped stabilise the market before. APRA could:

Reinstate Caps on Investor Loans: Limit how much lenders can increase loans to investors each year.
Raise Borrowing Buffers: Require banks to assess loan applications with extra margin above the actual rates.
Target Interest-Only Loans: Increase costs for riskier loan types, particularly those used by investors.

The tools are already there. APRA’s 2021 macroprudential policy framework clearly outlines how these measures can be applied.

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.

If these controls are put back in place, the benefits could flow to those who need them most: people trying to buy a home to live in, not those buying a second or third property for investment.

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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.

6. Where Policy Falls Short

While APRA’s macroprudential tools have been effective, relying on them alone won’t fully fix housing affordability. There is no magic bullet unfortunately. The report highlights the need for renewed controls but sidesteps other obvious levers, like negative gearing and capital gains tax (CGT) discounts.

Here’s our reality:

Negative Gearing & CGT Discounts: These tax benefits make property investment more appealing by reducing costs and increasing profits. They tilt the playing field against owner-occupiers, especially first-home buyers. Yet, the government has avoided making any changes to these settings.
Mixed Messages: On one hand, the government promises to increase housing supply with ambitious building targets and infrastructure upgrades. On the other, it ramps up demand through schemes like the 5% deposit option and shared equity co-investment. These demand-side boosts risk pushing prices up further, offsetting the benefits of new supply.
Bias in the Report: The document assumes that macroprudential policy is the most viable solution, likely because it’s a lever the Commonwealth can pull without major legislative change. But this doesn’t mean it’s the only—or even the best—approach.

This bias may stem from political caution or a desire to avoid tough reforms that could upset investors or property owners.

It’s a reminder that systemic problems need comprehensive solutions, not just regulatory tweaks or policy announcements for the sake of capturing attention or power.

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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.

7. The Impact for Homeowners

If macroprudential controls aren’t renewed, investors could once again flood the housing market, driving up prices and pushing more everyday buyers out. For homeowners and those trying to buy, this isn’t just a policy debate—it’s about real dollars and real dreams.

When investors have easy access to cheap money, they can outbid owner-occupiers, snapping up properties for rental or speculation. This pushes prices higher, making it harder for first-home buyers to break into the market. Even those already paying off a mortgage could see prices rise, meaning higher future borrowing costs or more competition when upgrading.

On the flip side, proper use of APRA’s tools—like caps on investor loans or increased borrowing buffers—can shift the balance. By limiting speculative demand, these measures ensure that falling interest rates benefit those looking for a home to live in, not just those building investment portfolios.

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

👉️ Understanding these dynamics is important to navigating today’s market and planning for the future.

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Smart macroprudential controls can mean a housing market dominated by investors or one where first-home buyers have a real shot.

8. Conclusion: A Call for Balanced Reforms

We believe the evidence is clear: macroprudential policies—like limiting investor loans or raising borrowing costs for high-risk lending—can slow down runaway house prices and give first-home buyers a fighting chance. We’ve seen this before, and with rates set to fall further in 2025, these tools are more relevant than ever.

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

True housing affordability needs a combination of approaches. While the government’s focus on boosting supply is important, it must also address the demand side of the equation—by considering reforms to negative gearing, CGT discounts, and the very policies that encourage speculative investment.

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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 housing prices?
When APRA tightened lending rules between 2014 and 2017, house prices fell despite low interest rates. This was because it became harder for investors to flood the market, reducing competition and cooling prices.

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 to stay informed and prepared?
Stay updated on lending rules, market trends, and government policies. Work with financial advisors and explore loan options carefully to make informed decisions.

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.