The affordability paradox
Here is the housing story that should have everyone’s attention: Australian property prices are falling — yet housing affordability has just hit its worst level on record.
According to the latest realestate.com.au Housing Affordability Report, a household earning around $125,000 a year could afford just 12% of homes sold nationally in 2025–26.
That is the lowest result recorded in the report’s series.
Five years ago, when mortgage rates were at historic lows, that same typical-income household could afford 43% of homes sold.
So how can affordability be getting worse when property prices are falling?
The answer is that the cost of borrowing has overwhelmed the benefit of lower prices.
Three Reserve Bank interest-rate increases in February, March and May 2026 significantly reduced household borrowing capacity. That more than offset income growth and the softening in property prices towards the end of the financial year.
The result is a brutal reminder for buyers: a cheaper house does not necessarily mean a more affordable house.The Housing Industry Association reached a similar conclusion using a different affordability measure. Its March-quarter 2026 data showed national affordability deteriorating by 4.5 per cent, with more than 1.8 average incomes required to service a typical mortgage, the weakest outcome since the HIA began its index in 1994.
For property buyers, the practical lesson is clear: lower prices only help where the reduction is large enough to outweigh higher borrowing costs and where a buyer can still meet lender serviceability requirements.
Affordability is more than price
A useful simplified framework is:
Housing affordability = (Property price + cost of borrowing) ÷ household income and available deposit
This is not a formal lending formula, but it shows why commentary focused only on house-price movements can be misleading.
Four variables shape a buyer’s real purchasing position:
- The purchase price. A lower price reduces the amount a purchaser must borrow and may reduce the deposit required.
- Interest rates and borrowing capacity. Higher interest rates increase mortgage repayments and reduce the amount a lender will allow a household to borrow, usually after applying an additional serviceability buffer.
- Household income. When earnings rise faster than dwelling values and mortgage costs, homes become more affordable relative to income. When dwelling values and financing costs outpace income growth, affordability deteriorates.
- The deposit and transaction costs. Stamp duty, legal costs, building inspections, lender fees and mortgage insurance can materially affect a buyer’s entry costs. In Sydney, these expenses can remain substantial even if the headline purchase price has declined.
This is why a buyer who sees a five per cent fall in a local median price may still find that their options have narrowed. If a rate increase reduces borrowing capacity by more than the saving created by that price decline, affordability has moved backwards.
Why the Sydney market is difficult
Sydney has long combined high dwelling prices with strong demand for well-located housing, employment access, established amenities, transport and schools. These fundamentals can make the market resilient, but they also make entry difficult for households dependent on ordinary wage growth.
The broader national data shows the scale of the mismatch between dwelling values and incomes. Cotality data cited in recent reporting places the dwelling-value-to-household-income ratio at approximately 8.5 times in metropolitan Australia and 8.4 times in regional Australia. The near-equivalence also illustrates that moving from a capital city to a regional location does not automatically solve the affordability challenge.
For Sydney property buyers, the consequence is that location, dwelling type and condition have become more important trade-offs than ever. The decision is often no longer simply between buying now and buying later. It can involve choosing between:
- A freestanding house further from employment centres.
- A townhouse or villa in an established middle-ring suburb.
- An apartment with better transport access and lower entry cost.
- A property requiring renovation or remediation.
- A smaller dwelling in a location that supports long-term lifestyle and resale demand.
At Buyer’s Domain, we advise our clients to consider affordability in terms of the buyer’s complete financial position and strategy, rather than treating the median price in a suburb as a complete answer. A property may be cheaper initially but cost more over time through poor transport access, higher strata levies, extensive maintenance, limited buyer demand or constrained resale appeal.
Ways to Fix Affordability
There is no single policy that can restore affordability quickly without trade-offs. A credible response requires attention to both the cost of housing and households’ capacity to pay for it.
1. Build more homes in the right locations
Additional supply is fundamental. Where the number of homes does not keep pace with household formation, population growth and employment concentration, competition for existing housing intensifies.
However, a target alone does not produce affordable homes. The important questions are where new housing will be delivered, what type of housing will be approved, whether it will meet the needs of different household types, and whether infrastructure will support the growth.
For Greater Sydney, well-located supply is particularly important. New housing delivered far from employment, public transport, schools and services may increase dwelling numbers but still impose substantial time and transport costs on residents. Well-designed infill development, gentle density near established centres and transport-oriented housing can provide a more practical route to expanding choice.
The HIA argues that the underlying cause of Australia’s affordability problem is insufficient housing supply relative to population and economic growth. It states that Australia is attempting to accommodate approximately 11 million households in around 10 million homes.
That proposition should be assessed carefully, but the underlying principle is sound: sustained affordability improvement requires enough suitable housing to meet demand.
2. Reduce the cost of delivering housing
Australia cannot build genuinely attainable new homes if the cost of delivering them remains too high.
The final price of a new dwelling reflects far more than the cost of bricks and labour. It can include:
- Land acquisition costs.
- Planning uncertainty and approval delays.
- Infrastructure contributions.
- Development finance costs.
- Construction materials and labour availability.
- Compliance requirements.
- State taxes and charges.
- Builder risk and contingency allowances.
This does not mean that planning requirements or building standards should be disregarded. They serve important public purposes. It does mean that governments need to examine whether processes achieve their objectives efficiently and predictably.
When approval pathways are uncertain or slow, capital is tied up for longer and risk rises. Those costs ultimately flow through to purchasers and tenants. Making housing cheaper to deliver is therefore not simply an industry concern. It is an affordability measure.
3. Test tax and investment policies against supply
Housing tax settings are contentious because they affect owner-occupiers, investors, developers, tenants and governments differently. The relevant question is not whether a policy is politically popular in isolation. The relevant question is whether it improves affordability over time without unnecessarily reducing the supply of homes.
Many industry stakeholders have raised concerns about changes to negative gearing and self-managed superannuation fund borrowing arrangements, arguing that restrictions on private investment capital could affect future housing supply. The Government’s own modelling indicates that changes to negative gearing and capital gains tax could reduce housing supply by around 35,000 homes over the coming decade.
That does not mean all investor-focused reforms are necessarily harmful or that every investment incentive is effective. It means the policy analysis must distinguish between demand for existing dwellings and capital that helps finance construction or supports rental supply.
A reduction in prices may appear positive in the short term. Yet if it coincides with weaker construction, reduced investment and a smaller rental pipeline, the longer-term affordability outcome may be worse. Good policy should be evaluated over a full housing cycle, not merely by its immediate effect on auction clearance rates or median values.
4. Increase productivity and real incomes
The long-term affordability discussion cannot be limited to making homes cheaper. Australia also needs households to become more financially capable of buying them.
This is where productivity matters. Productivity is the amount of output produced from a given level of labour, capital, technology and other inputs. Over time, improved productivity supports sustainable real-wage growth and higher living standards.
The Productivity Commission describes productivity as the main driver of long-term prosperity and the clearest path to sustainably improving real wages and living standards. Its September 2026 update reported that labour productivity was flat in the June quarter and declined by 0.2 per cent over the year to June. It also stated that overall productivity was only about 1 per cent above its 2015–19 average level.
The longer-term trend is also weak. The Australian Bureau of Statistics reported that the 20-year average annual productivity-growth rate was 0.8 per cent in 2023–24, down from 1.8 per cent in 2003–04.
The link to housing is straightforward:
Productivity growth is not a quick solution for a household trying to buy in Sydney this year. However, it is central to restoring a healthier relationship between incomes, savings capacity and dwelling values over the coming decades.
Without stronger productivity, governments face a difficult choice between policies that support demand, policies that constrain prices, or policies that redistribute housing costs. None fully addresses the underlying challenge of weak real-income growth.
5. Recognise the trade-offs
There is no painless housing-affordability solution.
Substantial property-price falls may assist some future buyers, but they can also reduce household wealth, affect consumer confidence and create negative equity risks for recent purchasers. Persistently rising prices benefit existing owners on paper but make market entry more difficult for younger households and renters seeking security.
Demand-side assistance, including grants and lending schemes, may help eligible buyers compete, but it can add to price pressure if supply does not respond. Restricting investor activity may reduce some demand for established dwellings, but it may also reduce rental supply or development finance in certain circumstances. Building more homes is essential, but planning, infrastructure, land servicing and construction take time.
The best approach surely deals with a combination of factors: More well-located supply, more efficient delivery, carefully designed tax settings, realistic infrastructure planning and stronger productivity-led income growth.
What Sydney buyers should do now
For individual property buyers, waiting for a broad affordability solution is not a strategy. Markets, interest rates and government policies will continue to change, often in unpredictable ways.
We recommend that buyers focus on the factors they can control:
- Establish a realistic borrowing position before beginning an active search, including lender buffers and likely repayment scenarios.
- Define non-negotiables separately from preferences, particularly around commute, property type, school catchment, parking, outdoor space and renovation capacity.
- Assess the total cost of ownership, not only the purchase price. This includes strata levies, maintenance, insurance, land tax exposure where relevant, renovation costs and transport costs.
- Evaluate comparable sales carefully rather than relying on automated valuation estimates or an advertised price guide.
- Consider whether a property will remain suitable through foreseeable changes in household size, employment, schooling or caring responsibilities.
- Seek independent legal, building, pest, financial and lending advice appropriate to the property and transaction.
A falling market can present opportunities, but it also requires discipline. Buyers should not assume that every price reduction represents value. Equally, they should not assume that a higher-quality property in a tightly held Inner West location is poor value simply because it is expensive. Value depends on condition, scarcity, location, long-term utility, competing buyer demand and the risks identified through due diligence.
The essential conclusion
Housing affordability is at a record low not because property prices have failed to fall, but because prices, mortgage costs and the income required to service debt have become badly misaligned.
The policy response must be broader than a desire for cheaper houses. Australia needs more homes, lower delivery costs, policies that strengthen rather than inadvertently weaken supply, and stronger productivity growth that can support sustainable real-wage gains.
For Sydney property buyers, the immediate priority is not to predict every market movement. It is to make a carefully researched, financially sustainable purchase decision based on clear objectives, sound due diligence and an informed understanding of the property’s underlying value.
In a market where the headline price can be falling while the cost of buying is rising, identifying genuine value has never been more important.
At Buyer’s Domain, that is precisely where our focus lies: helping buyers understand not just what a property costs, but what it is actually worth — and whether it makes sense for them to buy it.
