How the two iron laws of Australia’s property market put the squeeze on every generation | Cameron Murray

Every generation has its housing problems. With interest rates rising, the late 1980s is an era we will hear more about.

That period saw mortgage interest rates ratcheting up from 9% in 1983 to their peak of 17% in 1990. It was tough for homebuyers. It also left us with the legacy of family conversations about “how hard buying a house was with 17% interest rates” and how “we didn’t waste our money on avocado on toast as you do now”.

Homebuyers in that period indeed had a tough time repaying their mortgages.

But any comparison between eras must recognize that prices were lower then because of high-interest rates, just as today’s high prices are high because of low-interest rates.

My view as a housing economist is that every generation faces the same two iron laws of housing markets. First, rents and prices tend towards the limit that renters and buyers can pay. Second, the market moves in cycles, and opportune buying times do not last.

But these problems look different for each generation.

In the 1930s, it was working-class slum conditions in the wake of the Great Depression. While private property markets satisfied the middle and upper classes, the poor conditions of the working class began to force the hand of government to intervene in housing. A 1947 review, The Housing Problem in Australia, noted that in this period, low-income groups were “seriously neglected” and “had not been able to afford a home of modern standard as well as adequate food and clothing”.

Now, rents tend towards the limit people can pay, regardless of the poor conditions.

In the postwar era, shortages of materials for new housing were the main problem. What was unique about this era was the heavy-handed government involvement in housing development and provision for the working class.

Governments acted as land developers and intervened in supply chains to make labor and materials available for catch-up housing construction.

If your mortgage interest rate is 2%, going to 2.5% increases your interest payments by 25%


This period also saw a last sustained rise in homeownership rates – from 52% in 1947 to more than 70% in 1961. By 2016 homeownership had fallen back to 65%.

In the 1960s, conservative mortgage lending, requiring high deposits, saving requirements, stable jobs, and family structures, created a different limit on who could buy homes.

Related issues still exist today. The challenge of saving a deposit concerns both sides of politics, leading to the announcement of Labor’s shared equity scheme and the Coalition’s superannuation-for-housing scheme during the election period. But the iron laws of housing suggest that any benefits will be temporary.

The modern era started in 1993 when Australia began managing the macroeconomy with monetary policy. Higher interest rates are used to reduce house prices and spending, and low rates to boost them.

This is why in 2020, I predicted that property prices were more likely to rise 20% than fall 20%, despite the economic panic.

This led to an opportune time to buy. First homebuyers took advantage, and the number of first homebuyer mortgages grew to 171,000 in the 2020-21 financial year. The average over the three years before that was just 95,000.

The second iron law then kicked in. Property prices grew. And as they did, the advantage of low-interest rates was unwound. Now, as interest rates rise, the situation only gets worse.

This is why the Reserve Bank of Australia’s 0.5% point increase in the cash rate this week generated so much discussion. If your mortgage interest rate is 2%, 2.5% increases your interest payments by 25%. It’s like going from a mortgage interest rate of 10% to 12.5%.

Buyers today will be stretched to their limit, just as they were by the rising interest rates of the late 1980s. It’s the first iron law of housing, after all. Only now, high prices mean the limit is reached at much lower interest rates. It is not avocado toast.

Dr. Cameron Murray is a research fellow in the Henry Halloran Trust at the University of Sydney.

Bella E. McMahon
I am a freelance writer who started blogging in college. I am fascinated by human nature, politics, culture, technology, and pop culture. In addition to my writing, I enjoy exploring new places, trying out new things, and engaging in conversations with new people. Some of my favorite hobbies are reading, playing music, making crafts, writing, traveling, and spending time with my family.