Do we really need more tax breaks and demand for property?

May 2022 Australian property market affordability update

Australian property market prices have started to drift lower. In recent months, mortgage fixed interest rates have risen substantially, now standard variable rates are on the rise. The official rate rose, and already affordability is as poor as it has ever been in some markets. 

Housing valuation and affordability statistics worsened over April. For investors, rental yields have never been lower in an absolute sense. Relative to mortgage rates yields are still cheap, but off the record lows of a few months ago.

Markets are pricing in an extraordinary 3%+ increase in interest rates over the next few years. That would double the 2021 mortgage repayments for a 20% deposit mortgage. Given Australia has (a) the second most indebted consumers in the world and (b) mostly variable interest rates, it seems unlikely that interest rates can rise another 3% without crashing the property market before that. 

The Federal Government and Reserve Bank have successfully distorted conditions to encourage as many people as possible to borrow as much as possible. An investment in housing is basically a vote of confidence in their ability to keep force-feeding the market.

We run an Australian property market calculator to help investors or potential homeowners determine the returns on Australian property. The idea we want to illustrate is that there are a number of key inputs into housing valuation. Interest rates are the most important, but the other limiting factors are:

  1. Mortgage Payments to Rent: comparing the cost of a mortgage with the cost of renting the same house. Using this ratio to constrain house prices, we assume that people will prefer to rent when the ratio gets high rather than buy.
  2. Mortgage Payments to Wages: assuming when the ratio gets high, people rent because they cannot afford to buy. 
  3. Property Prices to Wages: assuming when the ratio gets high, people rent because they cannot save enough money to afford a deposit. We treat this as less important than the above two ratios.
  4. Rental Yield: Rental yield is the annual rent divided by the property price. By using this ratio to forecast prices, you are assuming when the ratio gets low investors will not buy property as they are not getting a return that is high enough.
Property valuation percentile House valuation change  Property Valuation



For the details charts for the above locations see the property detail update. For more on how and why we use these ratios see our residential real estate forecasting methodology.

Australian mortgage rates are on the march.

There are effectively two different interest rates at the moment, the floating rate and the three-year fixed rate.

  • The floating rate is determined mainly based on the Reserve Bank of Australia. It reduced the floating rate to 0.1% in March 2020, which reduced the standard variable rate from banks to around 4.5%. Discounted variable rates made it as low as 3.45% and have now risen to 3.7%. 
  • In March 2020, the Reserve Bank also introduced a facility where they lent directly to the banks at 0.1% for three years. This facility (and other market interventions) allowed banks to drop three-year fixed mortgages to around 2%.  Its name is the Term Funding Facility. It ended in June last year, and now three-year mortgages are over 4%.

When you adjust the factors in our property market calculator, you find that with higher interest rates, you would have to put in never-seen-before valuation ratios for house prices not to fall.    

Battle of the housing stimulus plans

Labor has a plan to help homeowners with a deposit that will be treated like equity, and can be eventually repaid. The Coalition wants to allow first home buyers to effectively borrow from their own superannuation to fund a housing deposit.

It is an admirable goal to have more homeowners. It is less admirable to encourage higher prices by giving tax or regulatory breaks. Both parties are effectively finding a way for new homeowners to increase house prices.

The Reserve Bank is currently raising interest rates to cut off inflation. The largest contributor to Q1 inflation? Housing.

Which brings us to the bigger issue. Affordability. Both parties want to help homeowners buy, neither is helping to lower the ongoing cost. And there is a reasonable argument that the Reserve Bank will have to raise rates more than if the policies weren’t in place.

Have a look at the chart for Sydney:

Which party has a better policy? I find it hard to love either. And there is far less between them than the parties try to make out.

Both policies are going to help with the deposit, but hinder the ongoing affordability. Which sounds like a short term gain for long term pain.

Do I have a problem with using super? Not really. Except that housing already has a raft of tax breaks, and superannuation is yet another tax break. And so, it will be doubling down even further on tax breaks for property.


Macro factors

Property Macro Factors

Australian Property Market Outlook

Property prices have been ripping higher in recent months. This has dented a number of affordability measures, but ongoing conditions appear as positive as they have been for some time.

Housing demand supply factors

On the one hand, plummeting immigration, pandemic disruptions and the end of eviction/mortgage payment moratoriums aren’t helping. A boost in supply is in progress, spurred by new home building. Rental growth jumped again this quarter, but the last few years have been very weak. And Australia starts with a larger private debt burden than just about any other country.

On the other, we have a burning political desire to keep Australian property market prices high and pump more debt into the economy. Wage growth is low, meaning interest rates can stay lower for longer. We have a roadmap to much lower interest rates to help. There is a structurally higher demand for houses vs units due to the fear of more lockdowns. There is structurally higher demand for bigger houses, more rooms or fewer housemates given the move to work from home.

Australia is stuck in a debt trap. We’ve got so much debt we can’t raise rates because it makes it more difficult for people to pay back debt. To get more growth we have to cut rates, so people borrow more and the cycle goes on.

The most important issue right now is interest rates.


Nucleus Wealth has compiled this data using a range of different sources.

We use Domain for more recent data quarterly property prices and rents, cross-checked with SQM to fill any short-term moves. Older information is from Rismark and the Australian Bureau of Statistics to fill time series.

For economic data, we use either Reserve Bank of Australia or Australia Bureau of Statistics data. For older data, we have had to estimate some factors due to differing definitions over time.


Damien Klassen is Chief Investment Officer at the Macrobusiness Fund, which is powered by Nucleus Wealth.

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The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an Authorised Representative of Nucleus Advice Pty Limited, Australian Financial Services Licensee 515796. And Nucleus Wealth is a Corporate Authorised Representative of Nucleus Advice Pty Ltd.

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  1. Strange economicsMEMBER

    So can anyone explain why are rents going up when immigration has stopped and gig workers moved back into the parent house, and no overseas students? Rental demand for high rental places has dropped yet rents go up?

    OK, Some units in Docklands and City centres are kept empty, collecting tax losses, or by Meriton to maintain the rent price for the rest.
    Ok, In the regions it can be explained – a few hundred work from home escapees can take up all the available rental housing in a beach town, and only $ 1 miilion plus new homes are built. They need to build low income, or mobile home accommodation.

    But in the capital cities – Why?

    • kannigetMEMBER

      My Real estate agent notified me of a large increase in rent starting January this year. I wasnt happy and pshed back and asked for some of the repairs to be completed. a month later they issued ‘notice to vacate’. It only took me 3 weeks to find a new rental and while the rent was higher it is a much better place. By the time I finished moving I had the real estate on 4 seperate tenancy act violations.

      I had no issue finding new accomodation, there was heaps on the market and not many people looking. Admittedly I am in a higher income bracket than most.

      A friend was also given notice to move as his landlord sold the apartment to a owner occupier. He had no trouble finding another apartment as there was heaps available. He had trouble finding one worth what the asking rent was. He said “I could rent a 4 bedroom house for 20% more than any of the 1 bedroom apartments I have looked at.” He eventually settled on a 2 bedroom townhouse for the same rent he was paying,

      I dont know what it is really like for the lower end of the market but up at the higher end there isnt a shortage of rentals.

    • Rents are not going up in my Melbourne suburb — asking rents are pretty much the same as before COVID, and I managed to secure a rental a month ago for below asking price. I’d like to know as well where all these suburbs where rents are going up?

      • Correct. We’re still charging peanuts for our property in Frankston area.
        But here around the ACT there are no cheap rentals.

        • Glad I stayed in Melbourne then. All the people who fled due to the temporary lockdowns are being stiffed with high rents. Meanwhile here we have less people than when COVID started, and little immigration to drive that up anytime soon. I wonder if we’ll see a shift in domestic migration back to Melbourne anytime soon?

      • I’m seeing the same in 3012. No increase in my rent since 2020 and new rentals coming onto the market all the time as old bungalows on 1/4 acre blocks are knocked down and replaced w/ 3 – 4 units.

    • DingwallMEMBER

      I have no idea why rents are going up either. Assuming heaps of people that were renting have now bought into the market (to send prices stupid) there should be a relatively net/ net balance. If every other person was buying investment properties, more rentals should be available for those left in the renting game.
      Unless a lot more people are leaving their properties empty or now live out of two homes … a weekender to escape next covid waves and their city home if things seem ok.
      Brisbane is bad because every dipstick is moving here thinking QLD did better with COVID (lol) and the prices were marginally less stupid than Melb and Sydney. But there are lots apartment free.

      • Northern rivers is a nightmare . Jeez it’s sad.

        Really hard to recruit staff for roles from out of area as prices so high/rentals high (refer two floods and things are still dire) so people won’t take roles (this is high end or specialised work)

        The feds and state better get a move on with Lismore. It’s a disgrace

        • DodgydamoMEMBER

          With federal and state “can do” governments which pride themselves on “getting on with the job” should be all sorted by now?

    • WhatcouldgowrongMEMBER

      Based on what I’ve read it seems that because of the incentives over COVID there were obviously quite a few people who were keen to become investors or increase their portfolio. Since the buy in prices are higher, someone needs to cover their mortgage.

  2. Good luck renting a 4 bedder on the North Shore / Upper North Shore in Sydney. Available rental “houses” are super tight and have stayed tight thanks to Covid. For many it is not an issue, there are 2-bed units everywhere. For families that are in rentals and trying to stay close to the schools their kids attend etc it is a nightmare. There is so little available for rent and what is available is priced so high it might as well be a jumbo mortgage. After sticking with this bullsh$t for so long I am starting to think rents may keep prices for houses high for the next long while. If inflation creates wage increases then more fuel to support rent increases.

    We are well off the pages of my old textbooks on this one!

  3. Question: What is going to stop them from just TFFing to infinity once things look a little weak?

    • The RBA is tasked with protecting the dollar to prevent inflation. So it has to raise rates if the Fed raises rates. After all if your local bank is offering 0.1% interest on your savings and a foreign bank is willing to give you 3% on it, the local bank will see a draw down that would threaten its reserve holding requirements. That is especially true if there is a shortage of liquidity as would be expected in the coming credit crunch. Inflation stops the printing presses, pushing demand onto securing deposit by competing on interest offerings, which pushes up lending costs, which pushes up interest rates. At the same time governments are prone to give handouts to those suffering the effects of inflation producing more inflation.

  4. In Straya, this property specufestor Sshow poses an existential threat to the country, so no matter what happens, policies will always be geared toward keeping prices up. There is no other choice.

    So the existential crisis is coming. Because the specufestor Sshow is inherently unsustainable.

    • Indeed, but I guess the population ponzi and CB printing presses seem to make it sustainable.

    • Kind of like our resident Solar Sage, who infamously “predicted” a crash in 2020…