Housing affordability has become a defining issue of Australia’s 2025 federal election, with both major parties unveiling policies aimed at helping first-home buyers.
However, economists warned that targeting demand without addressing supply risks driving home values even higher.
As CoreLogic’s Eliza Owen (pictured) pointed out: “Housing is an essential service and Australia’s largest asset class, so any policy shift must weigh the benefits to buyers against the long-term consequences for financial stability, household debt, and household wealth.”
This leads to the uncomfortable question at the heart of the housing debate: Should home values come down?
CoreLogic’s data suggested that even a 10% drop in national home values would leave most homeowners in a strong position.
“In the December 2024 quarter, 95.7% of residential resales achieved a nominal profit,” Owen said. “If resale values were reduced by 10%, 88.5% of vendors would still have recorded a gain, with the median profit sitting at $263,000.”
A 10% fall would rewind home values to May 2023 levels, lowering the value-to-income ratio from 8 to 7.2 and reducing the deposit needed for a median-priced home by about $16,000.
Concerns about negative equity — when a mortgage exceeds the home’s value — have been raised.
However, according to the Reserve Bank, “Even when faced with a severe 30% decline in housing prices, around nine in 10 mortgagors would still have positive equity."
Moreover, negative equity only poses a real risk if households fall behind on mortgage repayments and are forced to sell.
According to the 2021 Census, 31% of Australian households own their home outright, eliminating their exposure to negative equity.
Further insulating borrowers, APRA data showed about 70% of loans were written with at least a 20% deposit, providing a solid buffer against price falls, Owen said.
Historical data from Western Australia highlighted that price corrections can occur without widespread financial distress. Between 2014 and 2019, Perth’s home values fell 16.1% due to a mining downturn, CoreLogic data showed.
“By mid-2020, nearly 44% of home resales in Perth were made at a nominal loss,” Owen said. “Yet despite this prolonged downturn, mortgage arrears remained below 2%, and the financial system remained stable.”
Meanwhile, first-home buyers benefited from increased affordability, with Perth’s value-to-income ratio dropping significantly.
Mortgage stability in Australia is largely underpinned by robust lending practices, including serviceability buffers.
However, Owen cautioned that “some of the policy proposals floated ahead of the election, such as expanding low home loan deposit schemes or reducing the serviceability assessment buffer, may pose more risk to financial stability unless housing values do in fact continue to rise.”
This comes as new research commissioned by FBAA found that cutting the mortgage serviceability buffer from 3% to 2.5% could boost borrowing capacity by $276 billion, helping 270,000 more Australians and nearly 400,000 first-home buyers aged 25 to 34 access loans, especially with a 5% deposit.
Rather than fearing a drop in housing values, Owen suggested viewing it through a different lens.
“If housing costs were lower relative to income, Australians could redirect more spending to health, education, and technology, potentially even increasing earning potential as a result,” she said.
Yet the economic ties to housing remain complex. Real estate transactions drive state revenue and employment, and residential land accounts for 55% of household wealth, according to RBA.
Recent buyers — around 20% of properties changed hands in the past five years — could be particularly vulnerable if values fall, especially those who stretched financially during the boom.
Ultimately, Owen warned that ignoring affordability challenges could have even greater long-term consequences.
“The alternative — runaway prices, deepening inequality, and falling ownership rates — could prove more damaging in the long run,” she said.
While concessions for first-home buyers might deliver a temporary boost, the CoreLogic economist stressed they “do nothing for the long-term viability of homeownership as affordable and attainable.”
The debate is complex, but the stakes — for financial stability, equity, and future generations — could not be higher.
