Australia has reached a troubling point in its housing crisis: homes are becoming cheaper in several important markets, yet they are becoming even less affordable.

The apparent contradiction is explained by the rising cost of borrowing.

New figures from the Housing Industry Association show its national Housing Affordability Index deteriorated by 3.1 per cent during the June quarter, taking affordability to its lowest level since the organisation began keeping records in 1994.

The deterioration occurred in every market measured by the index — including Sydney and Melbourne, where dwelling prices have been falling.

It is an important distinction. A lower property price does not necessarily make a home more affordable when interest rates, mortgage repayments and construction costs are moving in the opposite direction.

Australia may be experiencing a property market correction, but it is not yet experiencing a solution to the housing crisis.

Almost two incomes needed to service a mortgage

The HIA index considers dwelling prices, mortgage interest rates and wages across Australia’s capital cities and major regional markets.

Its latest assessment found that it now takes the equivalent of 1.9 average incomes to comfortably service a mortgage on a median-priced home in an Australian capital city.

In regional Australia, the figure is 1.8 average incomes.

Housing is generally considered affordable when its cost can be met using no more than 30 per cent of a household’s income. For many Australians, particularly single-income households, that benchmark has become detached from reality.

The deterioration was not confined to expensive capitals.

During the June quarter, affordability declined most sharply in:

• Darwin, down 6.9 per cent
• Regional Western Australia, down 6.6 per cent
• Regional Tasmania, down 6 per cent
• Canberra, down 1.7 per cent
• Melbourne, down 1.1 per cent
• Sydney, down 0.7 per cent

Over the year, the largest falls were recorded in Perth, regional Western Australia, Darwin and Brisbane.

Melbourne was the only market in which affordability improved over the year — and then by only 0.1 per cent.

The figures demonstrate that the housing problem has spread well beyond Sydney and Melbourne. Rapid price growth in Perth, Brisbane, Adelaide and several regional markets has absorbed much of the affordability advantage those places once offered.

Why falling prices have not helped

A prospective buyer does not purchase a property with its advertised price alone. Most buyers purchase it with a deposit and a mortgage.

That means affordability is determined by at least three major factors:

• the price of the property
• the amount a bank is prepared to lend
• the repayments required over the life of the loan

A fall in the first can be overwhelmed by increases in the other two.

The Reserve Bank held the cash rate at 4.35 per cent in August after three increases earlier in 2026. The next decision is scheduled for September 29.

Headline inflation eased to 3.5 per cent in July, but underlying inflation remained at 3.6 per cent — still above the Reserve Bank’s target range.

Those figures have left open the possibility of another interest-rate increase. NAB expects a September rise, while ANZ and Commonwealth Bank have forecast an increase later in the year. Westpac expects the cash rate to remain unchanged during 2026.

These are forecasts rather than decisions, but even the prospect of another increase affects buyer confidence and lending calculations.

Higher interest rates reduce borrowing capacity. A household may consequently be unable to buy a property that has fallen moderately in price because the bank will lend it less money and require higher monthly repayments.

The pressure does not end with homebuyers

Housing affordability is sometimes treated as a problem affecting only people trying to enter the property market. Its consequences are considerably wider.

Higher mortgage costs affect existing owner-occupiers, landlords, tenants, builders and businesses.

Landlords facing increased repayments may attempt to recover part of the cost through higher rents, although their ability to do so ultimately depends on the local rental market.

Builders and developers must finance land acquisition, materials, labour and construction before a completed property can be sold. Higher financing costs can make projects unviable, particularly when established property prices are falling.

The result can be fewer homes being built precisely when Australia needs more supply.

The HIA says contracts for new home construction have declined for three consecutive months. It argues that the combination of high interest rates and continuing land, labour, infrastructure, material and regulatory costs is weakening the commercial case for new projects.

The organisation represents the residential construction industry and its policy conclusions should be understood in that context. However, the underlying economic problem is difficult to dismiss: suppressing buyer demand can reduce prices temporarily, but it does not necessarily make building additional homes cheaper.

Australia’s population is still growing

Demand for housing continues to be supported by population growth, smaller household sizes and the replacement of older properties.

Australia’s estimated population had reached approximately 27.8 million by the end of December 2025, according to the Australian Bureau of Statistics.

Every additional person does not require a separate dwelling, but sustained population growth increases the need for houses, apartments, rental accommodation, roads, water, electricity and community infrastructure.

Housing supply cannot be expanded merely by approving a national target.

Land must be released. Developments must receive planning approval. Roads and utilities must be provided. Builders must obtain finance, materials and skilled workers. The resulting homes must then be commercially viable at prices buyers or tenants can afford.

Failure at any stage slows the entire process.

This is why ambitious housing announcements have not automatically produced affordable homes on the ground.

Governments face conflicting objectives

Housing policy is complicated because governments are attempting to achieve several objectives that do not always fit comfortably together.

They want existing homeowners to retain the value of their properties. They want first-home buyers to enter the market. They want tenants to pay affordable rents. They want investors to provide rental homes. They want developers to build more housing, but they also want construction to meet planning, environmental and design requirements.

Measures intended to help one group can increase pressure on another.

Buyer grants and deposit guarantees can assist individual purchasers, but they may also add demand to a market in which supply cannot respond quickly.

Higher taxes or restrictions on investors may reduce competition for existing homes, but they may also discourage investment in rental housing.

Higher interest rates can restrain prices and inflation, but they also increase mortgage costs and make new developments more difficult to finance.

Planning reform can allow more construction, but approvals alone do not make projects financially viable.

There is no single lever capable of solving the problem.

A cheaper house can still cost more

The clearest lesson from the latest figures is that purchase price and affordability are not interchangeable terms.

Consider a buyer looking at a property after prices have fallen. If the property is $40,000 cheaper but higher interest rates have reduced the buyer’s borrowing capacity by $80,000, the buyer has not moved closer to ownership.

Likewise, if the mortgage requires a greater share of household income, the home has become less affordable despite its lower advertised price.

This is now occurring across much of Australia.

The property market can decline while the housing crisis becomes worse.

What would create sustainable improvement?

A durable improvement would require incomes and housing supply to rise faster than the total cost of securing a home.

That means governments must look beyond headline dwelling prices and address the costs embedded in housing production:

• serviced land
• planning delays
• infrastructure charges
• construction materials
• skilled labour
• development finance
• taxation and regulation

It also requires population and housing policies to operate together.

Australia cannot determine the number of people it will accommodate separately from the number and location of homes it can realistically provide.

Nor can policymakers assume that weakening the established housing market will automatically stimulate new construction. If sale prices fall below the cost of delivering new dwellings, projects will be postponed or abandoned.

The immediate outlook offers little comfort. Borrowing costs remain elevated, underlying inflation is still above target and the Reserve Bank has not ruled out another increase.

Meanwhile, falling prices may weaken household confidence without restoring sufficient purchasing power to aspiring buyers.

The Times View

Australia’s housing crisis is no longer adequately described as a problem of high property prices.

It is a problem involving prices, interest rates, incomes, construction costs, population growth, infrastructure and the commercial viability of building new homes.

The latest affordability figures expose the danger of celebrating a property downturn as though it were a housing solution.

A home that falls in price but requires more income to finance has not become more affordable. A policy that weakens demand while making new construction less viable has not increased supply.

Australia needs more than cheaper advertisements on real estate websites. It needs homes that can be built profitably, financed responsibly and paid for from ordinary Australian incomes.

Until those conditions begin moving in the same direction, falling prices will not mean the housing crisis is ending. They may simply represent its next phase.