Is it inevitable that house prices continue to increase? The substantial decline in house prices in Sydney between June 2017 and March 2019 shows that disrupting the financialisation of housing is a way to reverse the trend.
Spinifex is an opinion column. If you would like to contribute, contact us to ask for a detailed brief.
In the decade up to June 2017, Sydney experienced a phenomenal increase in residential property prices. There existed what was described as “a frenzied property market” and over this period house prices nationally increased by around 75 per cent in real terms.
However, the seemingly never-ending surge came to an abrupt end – the median house price in Sydney in March 2019 was $1,027,962, a drop of $170,000 or 14 per cent from its peak in mid-2017 and in the eight capital cities, prices dropped by about 11.5 per cent.
The article sets out to explain what triggered this significant decline. The reasons are of course highly pertinent for the contemporary housing situation and illustrate that increasing supply to rein in house prices is not necessarily the most effective intervention by government.
The key reason for the decline was the disruption of the intense financialisation of housing by the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA).
The financialisation of housing is characterised by housing being viewed as a prime investment opportunity. In the decade leading up to June 2016, investment activity by local and international investors was extensive and by mid-June 2016 around 2.6 million homes were owned by investors.
In four postcodes in Sydney, investors owned over 90 per cent of all the apartments.
Investment in residential property was greatly encouraged by negative gearing and the capital gains tax discount and easy access to credit. Investors and homeowners could obtain loans with relative ease. In April 2017, Australia-wide, interest-only loans accounted for 64 per cent of investor and 23 per cent of owner-occupier loans.
Besides local investors, foreign investors also viewed investment in residential property in Australia as a secure investment. Foreign investment in residential property increased from $8.77 billion in 2009-2010 to $34.7 billion in 2013-2014 and reached a high point of $72.4 billion in 2015-16.
Explaining the decline in house prices from mid 2017
Credit tightens up
The minutes of the monthly monetary policy meeting of the RBA board in April 2017 reveal increasing concern that a proportion of households could be under pressure due to lax lending standards:
Interest-only (IO) loans account for a sizeable and growing share of total housing credit in Australia, … IO lending has the potential to increase household’s vulnerability in part due to the higher average level of indebtedness over the life of an IO loan compared with a regular principal-and-interest (P&I) loan.
The RBA’s concerns were shared by APRA, and in March 2017, APRA announced that financial institutions needed to restrict interest-only loans to a maximum, of 30 per cent of all new residential property loans and avoid high-risk loans. In a letter addressed to all “deposit taking institutions”, it noted, “Our objective with these new measures is to ensure lenders are recognising the heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions.”
Lenders were also instructed to assess new home buyers on their ability to manage mortgage repayments with a 7.25 per cent interest rate. This requirement made it extremely challenging for low-income households to obtain a home loan and restricted demand.
Decline in investor loans
The restrictions on interest-only loans and the request that banks tighten lending rules had a significant impact on loans to investors.
Over the 2017 to 2019 period the value of investor lending in New South Wales and Victoria fell by almost 50 per cent. There is little doubt that the decline in investment activity helped soften house and apartment prices.
The drop in investor loans was also influenced by the Labor Party’s proposal to reform negative gearing and the capital gains tax if it won government in May 2019.
Negative gearing was to be restricted to new properties only and the capital gains tax discount was to be reduced from 50 per cent to 25 per cent. Chris Bowen the shadow treasurer at the time, justified Labor’s policy commenting:
Labor wants to create the conditions that promote home ownership, not a system which promotes a nation of property oligarchs and renters. The stronger growth for investors accumulating multiple investment properties is just another indication of the ”excesses” in negative gearing …
Foreign investors faced new restrictions.
In December 2015, an application fee was introduced. In May 2017, an annual vacancy charge was imposed for properties bought by foreign investors and left vacant for more than six months in a 12 month period.
Also, a 50 per cent cap on pre-approvals of foreign ownership in new developments was put in place in 2017.
Finally, there was a tightening up of compliance in relation to the foreign investment regulatory framework. In 2016-17, the Australian Tax Office employed 57 people whose sole activity was to scrutinise residential property investments by foreign investors.
In 2015-2016, the ATO identified 260 breaches of the framework and in 2016-2017, 549.
In late 2018, the Chinese government cracked down on capital outflows – citizens could only send out a maximum of $50,000 a year. Overall Chinese investment in Australia declined from a high of $47.3 billion in 2015-16, to $23.7 billion in 2017-18.
Weak demand
The pressure on lenders to be more stringent with respect to loans had an impact on investors and conventional home buyers. Despite low interest rates, over the same period (mid-2017 to March 2019) loans to conventional home buyers fell by 19 per cent in value.
In March 2019, it was reported that 8,000 homes in Sydney had been on the market for at least a year. The drop in house prices and the large-scale withdrawal of investors meant that potential buyers were more relaxed about entering the market.
The rekindling of the housing market
The re-election of the Coalition government in May 2019 put paid to any possibility of reform of negative gearing and the capital gains tax discount thereby encouraging investors to re-enter the market. Labor has now made it explicit that they will not reform negative gearing and the capital gains tax discount.
APRA, in July 2019, scrapped the requirement that lenders use a minimum interest rate of 7 per cent to assess home loan applications. Instead lenders were expected to “utilise a revised interest buffer of at least 2.5 per cent over the loans interest rate”. The final straw was the reduction in the interest rate to 0.1 per cent in November 2020 in response to the economic crisis precipitated by the pandemic and the governor of the RBA signalling that the historically low rate will prevail for at least four years.
Between March 2021 and March 2022, house prices rose 23.7 per cent.
Other policies such as the first home buyers grant added fuel to the housing market. It is argued that the scheme adds to demand and hence increases house prices. The 5 per cent deposit scheme introduced in October 2025 is also likely to increase demand and prices.
Investors are back in the market with a vengeance
Whereas investors accounted for 28.8 per cent (31,159 out of 108,220) of all dwelling loans in September 2019, in September 2025 they accounted for 40.1 per cent (57,624 out of 141,470), record high.
House prices across Australia are once again rocketing, increasing by 8.6 per cent in 2025. The increase is creating enormous hardship.
A recent report concluded that servicing a new mortgage consumes 45 per cent of a median household’s pre-tax income, up from 26 per cent in September 2020. In Sydney, a new loan accounts for 68 per cent of a median household’s pre-tax income if they purchase a house and 39 per cent if they purchase an apartment. The million or more low-income private renter households fear they will never be able to escape the vagaries of the private rental sector.
Surely, this cannot continue.
Excellent reminder of what powered the great post-GFC apartment housing ‘boom’ in Sydney and elsewhere, Alan, and the impact it had on the county’s financial stability. Tim Williams has been saying the same thing for years now. And it looks as if we are about to head right back into it thanks to the ‘supply side’ fixation of our state planning departments and rising prices which you describe which is exactly what developers need to start building again. The only difference may be the lack of overseas investors, although the BtR and student housing sectors may make up the gap for developers keen to build. Don’t hold your breath that the current planning policy ‘reforms’ in NSW will solve Sydney’s housing affordability crisis and help all those households trapped in the rental market with lower rents or lower apartment prices. But it will make a new generation of property developers very rich. As someone once said, same as it ever was.
And Bill, you may find yourself living in a shotgun shack…and you may tell yourself, “This is not my beautiful house”…and you may ask yourself, “Well, how did I get here?”