What would it take to lower housing prices in Australia?

While politicians can't say they want property prices to reduce, I investigate how we could get prices to fall and stay lower (not that many people want that).

In my recent post I looked into the factors that have led to the high housing prices we have here in Australia today. In this post I look at what it would take to lower housing prices in Australia and as you’ll discover a lot of these suggestions are undesirable and would be political suicide if they were implemented.

Here in Australia we have seen phenomenal home price increases over recent decades. While these increases in home prices have increased household wealth, they’ve also largely meant that we have to work more to support these elevated housing costs and that purchasing new properties becomes ever more expensive.

Governments have also played a role in supporting high housing prices, restricting the availability of new land for development and implementing policies which support high housing prices rather than policies which encourage lower prices and/or price falls.

This is a logical response from government, so much of our household wealth is driven by home prices it would be very difficult politically to implement policies that would permanently lower housing prices and therefore reduce household wealth. Furthermore, many more households own properties than those that don’t so politically higher housing prices are popular.

One of the reasons that housing costs continue to increase is that people continue to willingly pay higher housing prices. Quite simply, if people ceased paying higher prices then prices would fall. In saying this, I think the likelihood of a buyers strike is extremely unlikely and the fact that the market doesn’t respond in this way tells us something about the choices that households are making.

In the following sections I lay out the ways in which property prices could fall and those falls potentially be maintained. As you’ll note many of these options are unlikely to be enacted by governments. They are:

• A sustained increase in unemployment.

• Much higher interest rates for a sustained period

• Tighter macroprudential policies

• Increased taxes on property

• A significant slowing of population growth

• Absence of Government support for first home buyers

• New cities and better inter-connectivity between cities

• A significant increase in the supply of housing