Housing affordability improves — get set for a deluge of new first home buyers

House prices are softening, incomes are rising and demand pressures are easing, creating the strongest conditions for increased housing affordability in recent years and a potential surge in first home buyers. Stephen Koukoulas writes.

HOUSING AFFORDABILITY is a function of three main variables: house prices, household income and interest rates.

Although other issues clearly influence housing marketUnemployment, household formation, construction costs, and the like all filter into the main trio of affordability impacts in one way or another.

It is relatively easy to verify the extent to which affordability has changed by viewing trends in each of the main variables. However, when there are conflicting trends in these factors (for example, a decline in house prices and an increase in interest rates), interpretation can be a little more difficult.

By mid-2026, the housing sector is in the early stages of a significant improvement in affordability.

policy settings New supplies from the Albanian Government and lower net migration come into play with significant changes from last year.

The improving trend in affordability is due to the fact that house price growth has turned significantly negative. price falls In Sydney and Melbourne. While this is happening household income increase It is rising at a solid pace. These trends towards improving affordability are being offset to some extent by interest rate increases from the Reserve Bank of Australia (RBA) in the first half of 2026.

In the coming months, potential first home buyers are likely to line up to step onto the first rung of the property ladder given these positive trends, and particularly if the RBA moves to cut interest rates in late 2026 or 2027.

What is driving this change?

The weakness observed in house prices is due to developments in ordinary factors. With the strong increase in new listings for sale in recent months, the supply of new homes available for purchase is also increasing. This gives buyers a wider range of properties to choose from and, as a result, there is much less chance of ‘missing out’.

There was also a strong increase residential constructionThis will increase the housing stock, i.e. supply, with further delays.

At the same time, demand growth is also slowing down. Net migration levels are returning to pre-pandemic rates and latest tax changes Due to negative impacts on the budget and capital gains tax, investors will be less productive buyers in the housing market, especially of established homes.

In terms of interest rates and their impact on housing affordability, after three interest rate increases in the first half of 2026, markets are increasingly adopting a view that there will be no more interest rate increases in this cycle and interest rate cuts will be possible in 2027.

The task of accurately predicting interest rates is particularly difficult. Even the RBA has given up on predicting (giving “guidance”, as it calls it) the likely path of interest rates. However, it is clear that interest rates are more likely to be lower than higher over the next year or two due to weak domestic growth, rising unemployment, weak wage growth, the decline in inflation linked to the decline in global commodity prices, and the tightness of both monetary and fiscal policy.

The high level of the Australian dollar also negatively affects the export sector.

A scenario for recovery in affordability

For example, if house prices fall 5-7% over the next two years, while the household income of potential first home buyers rises by 10% and interest rates are 50 basis points lower than they are today (all reasonable predictions), housing affordability will increase materially.

For example, the house price-to-income ratio will fall from its current 5.5 times to 4.5 times. This is back to where it was over 20 years ago.

With interest rates falling, a median-income household borrowing 80% of the value of an average-priced home will face monthly repayments at or slightly below the long-term average as a fraction of their income.

In other words, better affordability.

What could go wrong?

As with all predictions, there are risks. The path to improved affordability is threatened by strong increases in construction costs, which could limit growth in new supply. Higher unemployment if delivered. It will disrupt income growth and housing demand.

Even taking these risks into account, the prospects for improving housing affordability are fully present. This will open up the market for first home buyers, which will increase homeownership rates in a relatively short time frame.

Stephen Koukoulas is one of Australia’s most respected economists, the former chief economist of Citibank and senior economic advisor to the Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk.

Support independent journalism Subscribe to IA.