The uncomfortable question at the heart of housing policy
5 min read
Housing has become one of the defining issues of the 2025 Federal Election.
As affordability worsens and rental markets remain tight, the question of how to support Australians into secure, affordable housing has rightly become central to both major parties’ campaigns.
Both major parties have released policies aimed at improving access to home ownership, particularly for first-home buyers.
Economists and industry experts have expressed concern that many of these proposals target demand in a market already constrained by limited supply.
Without corresponding efforts to increase supply, such measures risk placing further upward pressure on already elevated home values, the very dynamic driving the need for intervention in the first place.
Housing is an essential service and Australia’s largest asset class, so any policy shift must weigh the benefits to buyers against the long-term consequences for financial stability, household debt, and household wealth.
Essentially, there’s one uncomfortable question underpinning the debate…
Should home values come down?
For many existing homeowners, values do not need to continually rise to deliver strong capital gains.
CoreLogic’s quarterly resale data reinforces this.
Even if national home values were to fall by 10%, most homeowners would remain in a strong equity position.
In the December 2024 quarter, 95.7% of residential resales achieved a nominal profit.
If resale values were reduced by 10%, 88.5% of vendors would still have recorded a gain, with the median profit sitting at $263,000.
On the flip side, a 10% fall in national home values would rewind the market back to May 2023 levels.
The median value to income ratio, which was 8 at the end of last year, would go down to 7.2, and a 20% deposit on the median dwelling value in March 2025 would fall by about $16,000 (from $164,000 to $148,000).
One of the greater financial risks of falling home values recently cited in the lead up to the election is negative equity, which is where home values fall to be less than the value of outstanding mortgage debt.
The RBA estimates less than 1% of mortgaged households are in negative equity, and this is in part due to high home values.
But, as noted in their latest financial stability review, “even when faced with a severe 30 per cent decline in housing prices, around 9 in 10 mortgagors would still have positive equity”.
Besides this, negative equity is only really a danger when buyers fall behind on their mortgage and need to recoup their debt through the sale of the home.
The 2021 census revealed 31% of households owned their home without a mortgage, meaning no risk of negative equity from falling home values.
For mortgaged households, around 40% of owner-occupier mortgage holders on variable interest rates are at least two years ahead on mortgage payments, so negative equity should not pose much of an issue to these households, or the broader financial system.
Even for recent buyers who have not built up a buffer on their mortgage payments, APRA data shows around 70% of home loans were originated with a deposit of at least 20%, meaning the value of a home would need to fall more than 20% from the purchase value before the buyer was in negative equity.
Western Australia offers a useful case study of the impact to financial stability when between 2014 and 2019, home values fell by 16.1%.
This was due to a slowdown in mining investment and weakening iron ore demand, which in turn led to population and economic decline.
By mid-2020, nearly 44% of home resales in Perth were made at a nominal loss.
Yet despite this prolonged downturn, mortgage arrears remained below 2%, and the financial system remained stable.
First home buyers benefitted as the value to income ratio across Perth dwellings fell from 6.6 to 4.8 between June 2014 and June 2019.
This highlights how price corrections can occur without triggering widespread financial distress, provided lending standards remain strong and borrowers are well-positioned.
It is important to stress that the financial position of most mortgaged households has been stable over time because mortgages are traditionally lent with strong buffers, be it a 20% deposit or a serviceability assessment buffer on interest rates (which has been three percentage points on top of the product rate since late 2021).
Some of the policy proposals floated ahead of the election, such as expanding low home loan deposit schemes or reducing the serviceability assessment buffer, may pose more risk to financial stability unless housing values do in fact continue to rise.
Reframing the Conversation
A fall in values need not be viewed as a negative for the Australian economy.
Housing is not only an investment, but also something people consume.
If housing costs were lower relative to income, Australians could redirect more spending to health, education, and technology, potentially even increasing earning potential as a result.
Put another way, it wouldn’t be the end of the world if prices were to moderate or even fall slightly.
Still, the reality of cooling demand for housing is complex.
Housing value performance is tied to consumption through wealth effects, property taxes are a huge source of state government revenue, and many Australians are employed across the construction, financing and transaction of real estate. Even with widespread equity, households are likely to be sensitive to weakening housing values, with RBA data suggesting residential housing and land currently accounts for 55% of household wealth.
Not to mention the recent buyers and investors who purchased during periods of strong growth and are more exposed to price falls.
About 20% of residential properties changed hands in the past five years, and roughly 2.6 million home loans have been written in this period (with around one in four going to first home buyers).
But the alternative – runaway prices, deepening inequality, and falling ownership rates – could prove more damaging in the long run.
As a nation, we can’t keep kicking the can down the road on housing affordability.
Concessions and incentives for first home buyers might provide a sugar hit to home ownership numbers in the short term, but they do nothing for the long-term viability of home ownership as affordable and attainable.
