Good news! Housing is getting more and more affordable

Strong income growth, softer house prices and a more favourable interest rate outlook suggest housing affordability is set to improve over the coming years, writes Stephen Koukoulas.

ONE OF THE Albanese Government’s main policy objectives is to improve housing affordability. It is doing this to encourage and facilitate current renters to buy their own house and, in the process, lock in a key pillar of financial security and economic well-being for more Australians.

In time, the range of policy changes is expected to see a lift in home ownership, reversing the decline that has been evident in the past few decades.

The raft of policy changes behind this push is well known and, in some instances, will take several years to fully kick in. Discouraging investors, adding to dwelling supply and slashing red tape in the construction sector will not do much to help affordability in the near term, but will have a huge impact over the medium to longer run.

How is housing affordability measured?

The concept of housing affordability is well understood and relatively easy to convey. There are three main factors behind it: house prices, household incomes and interest rates. Improved affordability makes it financially easier for first-home buyers and others to buy a dwelling.

The deterioration in housing affordability in the past 15 to 20 years has been broadly driven by house prices increasing at a pace far in excess of household incomes, while the level of interest rates today is well above the average since 2010.

Housing affordability improves — get set for a deluge of new first home buyers

House prices are softening, incomes are rising and demand pressures are easing, creating the strongest conditions for improved housing affordability in years and a potential surge in first-home buyers.

To improve affordability, the necessary changes in the trend movement in these variables are obvious.

In no particular order or any allowance for orders of magnitude, there needs to be a reasonably long period of time (several years) when incomes are increasing at a faster pace than the change in house prices, whilst it helps if interest rates are flat or falling. Some permutation of these can see affordability improve; for example, if house prices can rise, but if incomes rise at a faster pace and interest rates are flat to down, affordability still improves.

It is possible and probably desirable from the perspective of the maintenance of financial stability that house prices do not fall much to improve affordability, as long as incomes rise at a faster pace.

Where are we now?

While it is very early days along the path to improved affordability, the recent trends are favourable and encouraging.

Household incomes are growing at an annual pace of 4-5 per cent; at a national level, house price growth started weakening at the start of 2026 and, in recent months, prices are falling most notably in Sydney, Melbourne and Canberra, with the pace of price increases slowing markedly in the other capital cities and in regional areas.

The three interest rate hikes from the Reserve Bank (RBA) through the first half of 2026 have hampered the trend to improved affordability, although its monetary policy moves are targeting broader inflation pressures, which, thankfully, are showing signs of topping out.

Efforts to house all Australians make slow but steady progress

The latest official data confirms that poverty and homelessness are gradually easing.

The next 12 to 36 months

Housing affordability is poised to improve significantly over the next few years.

Household disposable income growth is solid, with wage growth and income tax cuts the main contributors to what is good news. While the outlook is for the pace of wage growth to moderate as the economy slows, increases in minimum and award wages and, in some areas, skills shortages, will underpin incomes.

At the same time, house prices will likely fall further as a lift in supply (new construction plus extra listings), a cooling in demand (slower population growth) and, probably most importantly, further increases in the unemployment rate undermine prices. The drop in investor activity triggered by the tax changes is likely to be broadly offset by a lift in first-home buyer demand.

The question on the outlook for interest rates is always complex and volatile. Recall that as recently as August 2025, the RBA was cutting interest rates and money markets were pricing in further rate reductions. This picture was obviously overtaken by a series of inflation-positive events, including the U.S./Israel attacks on Iran and the retaliatory reaction, which saw the RBA reverse all of the 2025 cuts.

This goes to show how quickly the interest rate question can and often does change.

Suffice it to say, the current market pricing has all but taken out any probability of even one more interest rate rise from the RBA and is starting to price in the start of an interest rate cutting cycle in 2027 and into 2028.

If this market pricing is even broadly close to the mark, interest rates will provide the extra boost to improved affordability.

All together, these trends point to the stage being set for a sharp and potentially protracted improvement in housing affordability.

If so, expect to see a material increase in home ownership rates, an easing in demand for rental properties and an era of fairer opportunity for home ownership across generations. It is a good story.

Stephen Koukoulas is one of Australia’s most respected economists, a past chief economist of Citibank and senior economic advisor to an Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk and on Bluesky @thekouk.bsky.social.