Housing Affordability: How Important is the Lending Rate?

Melbourne Institute Policy Brief No. 01/16

Date: 2016


Guay Lim
Sarantis Tsiaplias


Housing affordability in Australia has been declining for some time, but is it across all states or mainly in Sydney and Melbourne? Are there spill-over effects (i.e., transmission of changes in one state to the rest of Australia)? Has the problem been exacerbated by a long period of low interest rates which have acted to fuel borrowing for housing without stimulating growth in household income? We examine the regional differences in housing affordability and its relationship with economic and demographic conditions. We find evidence of the influence of population growth and unemployment and spill-over effects. The influence of interest rates is particularly significant as there appears to be a critical lending rate threshold. When mortgage rates fall below this critical threshold, the probability of sharp rises in house prices, especially in Sydney and Melbourne, is high. The results have clear implications for the National Affordable Housing Agreement, particularly since it is during periods of significant appreciation that the issue of affordability is most important.

Download Paper