If you walked into a bank a year ago, you’d have been offered an interest rate of about 2 per cent and the bank would have applied a “stress test” to make sure you could afford the same loan with an interest rate of 4.5 per cent. If you had enough spare cash flow – after your non-housing living expenses were deducted from your income – to service the minimum repayments at that level, bingo, you got the loan.

Loading

Since then, the Australian Prudential Regulation Authority (APRA) has actually increased the stress test to 3 percentage points above the loan rate and the loan rates themselves, have of course, risen a whopping 0.75 percentage points since last month. Fewer borrowers will be able to afford the loan sizes they want at the new prevailing rates.

Actually, it’s worse than that. Thanks to inflation and the rising cost of living, people’s cash flow surpluses are also being crimped. That is, once you deduct higher living costs from stagnant wages, there is less cash flow available to service a loan – even if rates hadn’t gone up.

It’s a double whammy hit to borrowing power.

So, yes, the air is about to go right out of the housing market’s tyres, absent any dramatic changes in policy from the currently predicted path. If the CBA’s economists are right, we’re about to hand back most – but not all – of the home price gains seen during the pandemic.

That is particularly bad news for people who purchased in the last year or so, who may indeed see the value of their new homes fall below their purchase price. But, provided they stay put and can keep paying their loan repayments, they will likely weather the storm until prices rise again.

For people who borrowed before that, check your privilege. You have still enjoyed significant windfall wealth gains.

For anyone looking to crack into the market for shelter, falling prices are, of course, good news. Higher interest rates on savings may even help to get you there sooner (if banks pass them on, that is).

For policymakers, it is critical they let this adjustment play out. History shows that politicians have a very high “reaction-function” when it comes to home prices. Politicians of both political stripes have thrown first-home buyers on the home-price fire to stop it going out.

Loading

During the early days of the global financial crisis, the Rudd government – despite being elected on a platform to try to improve housing affordability – decided to double first-home owners grants and tripled them on new homes in an attempt to prop up home values.

During the pandemic, the Morrison government expanded schemes to help first-time buyers get into the market on minimal deposits – essentially bringing forward demand into the market. While both policies carry the guise of helping first-home buyers, in reality they just add to demand and inflate prices further.

It’s unclear what impact the NSW government’s proposal to axe stamp duty and introduce a broad-based land tax will have on property values. Replacing one tax with another of equivalent value should, in theory, have the same impact on people’s appetite for property. Much will depend on the exact design and timeframe for the tax switch.

Loading

As for the new federal Labor government, the best that can be hoped – after it ditched its 2019 election housing tax policies – is that they will opt for a policy of “do no harm”, and not actively pursue policies to inflate housing demand again, as their predecessors did.

Housing market adjustments hurt. But in the long run, it’s better that home values do give back some of their super-sized gains of recent years. Every Australian deserves the chance to own a home, and falling prices give younger buyers a fighting chance.

Let them have it.

Cut through the noise of federal politics with news, views and expert analysis from Jacqueline Maley. Subscribers can sign up to our weekly Inside Politics newsletter here.