House prices have been falling, but it might not be enough

Lowering house prices is the best way to make housing more affordable, but experts say “heartless” major parties have almost completely discarded the approach.

Others say the scale of house price falls to make housing affordable again is too great, and would damage the economy.

Housing affordability is at its worst on record according to several measures. Sydney and Melbourne house prices have weakened recently, but marginal falls have not been enough to offset huge price rises over the past 20 years.

High interest rates have slashed borrowing capacities, yet house prices continued to rise, worsening affordability given that buyers could borrow less to buy more expensive homes.

Federal Housing Minister Clare O’Neil told Triple J in December that the Labor government didn’t want to see house prices fall, prompting concerns from those who want to see affordability improve.

It was former Liberal prime minister John Howard who famously said in 2004 that no one had ever stopped him in the street to complain about the value of their house going up.

Centre for Independent Studies chief economist Peter Tulip said that lowering house prices increased affordability on two fronts.

“It’s almost true by definition,” he said. “One [reason] is that young home buyers wanting to buy a home for themselves will have less of an obstacle to homeownership the lower prices are. The second reason is that lowering prices lowers rents.”

The Demographics Group co-founder Simon Kuestenmacher agreed. “Think about what affordability is: it is a simple relationship between the money you have and the cost of the home.

“So, in order to make housing more affordable, we could increase wages … or we could ensure wages could grow at whatever pace they do, but we establish a mechanism to make house prices go down.”

Kuestenmacher said effective affordability policy was hamstrung by voters who had an interest in house prices continuing to rise.

“So who are you making policies for in Australia? You’re not making policies for people who are not voting, non-citizens. You’re also not making policies for people under 18 because they can’t vote.” He said this left 64 per cent of residents who could vote.

“Out of this 64 per cent of people, 74 per cent live in a house they own or have a mortgage on. So of the voting core, only 26 per cent are renters and potential home buyers. The vast majority have no interest in prices going down.”

Kuestenmacher said this would leave younger voters and renters with a lingering distaste for the major parties if the issue wasn’t resolved.

Tulip agreed. “They’ve decided that wealthy home owners care more about the falls in the value of their asset than renters and home buyers care about getting a place to live … it does seem heartless.”

AMP deputy chief economist Diana Mousina agreed that falling prices could help affordability but said the falls needed to make a difference – about 30 per cent – would damage the economy.

“We’ve had such a long period of strong house price growth, and you can’t reverse all that,” Mousina said. “And I don’t think it’s positive for the economy for house prices to fall.

“That 30 per cent threshold is when you see more of the metrics … [the] home price to income ratio, years needed to save for a deposit, would become more in line with international norms.”

Tulip said falling house prices were not always bad for homeowners, and they affected other property owners more.

“If and when I came to sell my house, and the price was lower, I’d be selling my house to buy somewhere else, so the value of that house would be lower,” he said. “It’s not clear that I’d really be worse off.

“Many homeowners don’t see it that way, and there are lots of investors out there, and if they have an investment property … they don’t like reductions in their wealth.”

Tulip said federal housing policy was doing little to help but praised states that planned to increase housing supply by rezoning inner-city suburbs to increase density. His favoured solution to lowering prices was to increase supply.

Mousina disagreed that recent federal housing policy was ineffective because the complex nature of the problem meant a fix would take years to work. “ Australian housing is always going to be expensive because of the way our economy is structured.”

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Kuestenmacher said the Australian economy’s reliance on housing was part of the problem.

“High house prices are a God-awful thing for the market as well. We put all our wealth in there, and therefore we starve our Australian stockmarket of money,” he said. “Our economy becomes dumber. The global economic complexity index ranks how complex your economy is, and we rank 93rd [in 2021], below Uganda.”