Access to Finance

There is strong expert evidence that the availability and terms of housing finance have a significant impact on both the supply and price of housing in Australia.

Most Australians can't afford to pay cash for their homes, although the data suggests that this flips in some of the wealthiest suburbs. Similarly, most developers also can’t afford to pay cash for a development. Instead, most of us purchase homes with loans from banks and financial institutions and pay them back with interest.

Whether potential buyers and developers are eligible for a loan and the amount that can be borrowed, can be prejudicial, depending on income, existing debts, spending habits and credit history.

So, rule changes that banks apply to lending and interest rates can have significant consequences for people and developers alike.

The trouble with interest rates   

Most experts agree that interest rates are a significant contributor to the price of housing.

Economic theory says that lower interest rates drive up property values as people take advantage of increased borrowing capacity. On the other hand, higher interest rates drive them down as mortgages become more expensive. Though, this hasn’t quite been Australia’s experience in the last few years as housing prices continued to climb.

Interest rates also have a big impact on new home builds. Higher borrowing costs add to the price of development and developers need to judge whether buyers will pay the higher price or not. The difference can mean either developers delivering more beautiful homes or a dwindling supply.

If housing availability is low and new home builds are limited, interest rate rises are less effective as a mechanism to reduce house prices and improve affordability. As a result, the level of financial stress for people might increase as they struggle to pay off their loans.  

Who says I can’t get finance?! 

The Reserve Bank of Australia (RBA) and the Australian Prudential Regulatory Authority (APRA), that’s who. Well, sort of. 

Both of these institutions play significant roles in shaping housing finance via their own policies:

• The RBA controls the interest rate. It is potentially unfair because it’s applied in blanket form to the entire economy and society. There's no scope for targeting to achieve different housing outcomes.   
• APRA determines the lending rules, which are then applied by banks and other financial institutions, with some discretion, on borrowers. 

There is ongoing debate about whether the central bank, financial regulator and banks should take a more active role in addressing housing affordability and related social outcomes.

Investing and buying? What roles do they play? 

Investing in or buying properties plays different but crucial roles in shaping the housing market.

Property investors help to increase the number of houses on the market by purchasing housing.

But they primarily buy existing housing, which does not add to the number of houses available.

And, because they typically have stronger purchasing power than first homebuyers, they can generally beat the homebuyer at a sale. The downside is that this can push prices higher, making housing less affordable.

Australian governments have implemented various schemes, like the first homeowner grant, to assist first home buyers, though their effectiveness in improving overall affordability is debated.

Policy Personified   

Annie is a 32-year-old single mother who lives in the south eastern suburbs of Melbourne. She has been renting for five years since her marriage ended and is saving for a deposit for a home nearby. She has been knocked back for finance several times. She is told she is at risk of overextending herself financially. 

Jack is a 60-year-old investor. He owns several properties in the south eastern suburbs of Melbourne, which includes new builds for renters that have stimulated local growth.

Without additional properties being built, Jack is in a stronger position to purchase an existing property in the area. He has fewer financial constraints and can offer to pay more to secure another property.