Why falling house prices won’t fix housing affordability

This article is co-authored by Dr Anna Sekhar and Mo Bangura

Nationally, prices are now 5.2% below their March peak, according to the latest Cotality data. Yet affordability pressures haven’t eased to match.

The debate about housing affordability often focuses on what homes cost to buy. In reality, affordability is determined by mortgage rates, household incomes, rental costs, housing supply and access to jobs and services.

Looking at house prices alone risks misunderstanding the problem and the solution.

Interest rates can cancel out lower property prices

A lower purchase price doesn't necessarily mean a lower cost of home ownership.

Mortgage repayments are heavily influenced by interest rates. Even if property values decline, higher borrowing costs can make owning a home more expensive in practice.

The cash rate was lifted to 4.85% in November 2026, continuing a run of increases that has pushed up the cost of borrowing faster than prices have come down.

Consider a $700,000 mortgage over 30 years. At an interest rate of 4%, monthly repayments are about $3,342. At 6%, repayments rise to approximately $4,197, an increase of more than $850 a month.

For many households, that difference matters more than a modest decline in property prices.

Research on Australian capital cities even finds that house prices react unevenly to rate movements. Rate rises tend to push prices down further than equivalent rate cuts push them up, which helps explain why this downturn has felt sharper than past cycles.

This helps explain why falling prices have not translated into a dramatic improvement in affordability. Buyers don't purchase homes in cash. They purchase them with debt.

Why income is the biggest barrier to homeownership

Affordability comes down to the simple question of “whether a household comfortably meets its housing costs while maintaining a reasonable standard of living”.

For many Australians, the answer remains no.

Rental costs continue to absorb a growing share of household budgets. Rents rose roughly 5.5% over the past year, absorbing a growing share of household budgets and making it harder to save for a deposit.

At the same time, wages grew just 3.2% over the same period, meaning cost-of-living pressures have continued to outstrip take-home pay for many households. A cheaper housing market offers little benefit to prospective buyers who cannot accumulate savings or qualify for a mortgage in the first place.

The strain isn't just financial. Research on Australian renters has linked housing affordability stress to lower financial wellbeing, with flow-on effects for mental health. A falling market does nothing to ease that pressure if rents keep climbing.

The impact is also uneven. Some first-home buyers may benefit from lower prices, while recent purchasers may find themselves with mortgages that exceed the value of their homes.

This is known as negative equity, which means owing more on a loan than the property is worth. It doesn't necessarily mean a forced sale, but it can make refinancing, moving for work, or upsizing a family home far harder.

A shift in the market does not affect everyone equally.

Australia needs more homes, but supply is only part of the answer

There is broad agreement that Australia faces a housing shortage. New construction has failed to keep pace with demand, and forecasts continue to point to a significant shortfall in housing over the coming years.

The National Housing Supply and Affordability Council projects a shortfall of around 79,000 dwellings over the five years of the National Housing Accord.

The pipeline is also moving the wrong way. Building approvals fell 6.1% in August 2026, pointing to fewer new homes reaching the market over the next few years, not more.

However, supply is not a magic bullet.

Building more homes takes time and depends on labour availability, planning approvals, infrastructure investment, construction costs and market conditions. Even ambitious building targets may take years to influence affordability.

Some researchers go further, suggesting that even historically ambitious construction rates would only modestly improve price-to-income ratios after many years of sustained building. Supply alone was never going to be a quick fix.

The real question is not how many houses are built, but where they are built and for who.

Housing location is an affordability issue

Housing costs do not exist in isolation.

A household may save money by purchasing a cheaper home on the edge of a city, only to spend those savings on fuel, public transport, tolls or extended commuting times.

Research into how housing affordability is measured argues that these hidden costs are routinely left out of the picture, which can make an outer-suburb home look more affordable on paper than it actually is once travel and time costs are factored in.

This is one of the biggest blind spots in Australia's housing debate. A home is only genuinely affordable if people can access employment, education, healthcare and other essential services without imposing additional financial strain on the household.

Housing policy that ignores location risks solving one affordability problem while creating another.

While regional areas can offer relief from capital-city price pressure, that only holds if employment and public transport follow people there too.

What housing affordability should be judged on

The success of housing policy should not be judged by whether house prices rise or fall.

It should be judged by whether ordinary Australians can secure suitable housing without sacrificing other essentials such as food, healthcare, education or financial security.

Lower property prices may help some households. But lasting affordability will depend on higher incomes, manageable borrowing costs, adequate housing supply and better access to employment and services.

Until those factors improve together, Australia will continue to have a housing affordability problem, regardless of what happens to house prices.