Why falling interest rates won’t help affordability

A 'white-hot lust for property' means interest rate cuts that it is hoped will enable more people to become home owners could backfire rather spectacularly.

There’s understandably a lot of positivity about the impact of falling interest rates on housing affordability.

The mainstream media and the usual suspects of real estate boosters have been crowing that the reduction in mortgage interest rates will make a big difference, opening the door for new entrants and relieving cost of living pressures for those with mortgages already.

True, those with a pre-existing mortgage will save. But there are two major problems with our market and the self-inflicted harm our policy settings cause.

The first and most obvious problem is for new entrants: such is the white-hot lust for property, that any reduction in rates will almost immediately be reflected in higher housing prices, as more people compete for limited product.

Prices nationally have already jumped 4.1 per cent over the course of a year. Adding fuel to this fire is the reckless policy of our Federal Government to run all-time record immigration intakes at a time of housing shortages, and on top of that announcing a policy that supports 5 per cent deposits with no lenders mortgage insurance (LMI).

One former RBA economist is warning: “Launching this policy now is like pouring gasoline on a fire.”

There is so much that is wrong with our policy settings on this front that I’ll have to come back and pick them apart separately. The other problem is that mortgage rate reductions will be touted as beneficial, and this will take the spotlight off the underlying problem – which is that the actual cost of producing housing is just too high.

This is exactly what happened the last time we had an affordability crisis.

In 2007, the RBA cash rate was around 7.5 per cent and mortgage rates were in the 8 per cent plus range or more.

There were fierce debates in Federal and State Parliaments and talk back radio was alive with the BBQ stopper subject. I should know, I was at the time running the Residential Development Council for the Property Council of Australia and the round of media engagements and meetings with politicians around the country was endless.

A shortage of land for new supply, excessive regulation and compliance costs, an increasingly byzantine planning process and excessive taxes on new housing were the culprits.

(Source: RBA)

Along with many others in the industry, we produced a series of reports identifying the cruel impact housing policies were having on affordability, and in particular on the challenges of producing new dwellings – houses or units – at a cost people could afford. In one of them I wrote:

“The root cause of worsening housing affordability lies squarely at the feet of various public policy settings, identified in this discussion paper. If these policy settings continue on their present path, there is no question that housing costs will continue to spiral beyond reach of many Australians.

“As this happens, dependency on rental housing will increase. Future generations of Australians will not be able to afford a home of their own, and will increasingly be consigned to rental housing - and rising rental costs.

“Home ownership will be in the hands of an increasingly elite group of Australians: those wealthy enough to afford a home and those who bought into the housing market before the affordability crisis reached a tipping point.

“Housing standards will fall - due to price constraints - and new homes will be built on smaller and smaller lots, with cheaper and cheaper materials to stem the tide of ever increasing government and regulatory costs.”

Eighteen years later, I take no pleasure is being right on this. But what happened next was entirely unexpected: the global financial crisis arrived.

In response, governments around the world moved to avert massive economic calamity through a process euphemistically called ‘quantitative easing.’ Basically, they printed money - and lots of it.

Interest rates fell immediately and continued to fall until they reached ridiculously low levels – near zero in fact. Access to money, and the cost of that money, was both easy and almost free. Combined with the Covid epidemic that landed in 2020, there was zero political appetite for raising rates to realistic levels.

Housing stopped being a topic of conversation about affordability: it morphed into a topic of acquisition. FOMO was in force, and bigger and bigger housing debts wasn’t something most people worried about. No wonder that when rates finally did begin to return to more typical long- term levels, that those who had borrowed big when money was cheap found themselves hurting – a lot.

By Ross Elliott, Urban Development Expert and Commentator, Ross Elliott Advisory

|20-9-2025|Finance