Housing policy has overlooked one important market: housing finance. Australia's housing affordability debate has become dominated by taxation, planning reform, infrastructure provision and construction costs. These are all important. They are also all supply-side reforms.

Far less attention has been given to the way Australia's housing finance system has evolved over the past two decades.

Following the Global Financial Crisis, Australia progressively strengthened its prudential framework. Basel capital reforms were implemented, investor lending benchmarks were introduced, interest-only lending was restricted, serviceability buffers increased, and most recently limits on high debt-to-income lending were adopted.

Viewed individually, each of these measures can be justified. The more important question is whether their cumulative effect has ever been comprehensively assessed.

Australia's banking system is now exceptionally resilient. Regulators frequently describe it as ‘unquestionably strong’. Mortgage arrears remain low by both historical and international standards, and the financial system has successfully navigated a global financial crisis, a pandemic, and the sharpest interest rate tightening cycle in a generation.

These are important achievements. The question is whether the continued accumulation of macroprudential restrictions is now imposing costs that extend well beyond financial stability.

Consequence #1

One of those costs is competition.

Mortgage markets function best when lenders compete by assessing and pricing risk. Increasingly, competition has shifted toward compliance with standardised regulatory settings. The result is a market in which lenders have less scope to differentiate, innovation is reduced, and access to credit becomes increasingly determined by regulatory thresholds rather than lender judgement.

Consequence #2

A second consequence is efficiency. Restricting access to credit for borrowers who have the demonstrated capacity to service a loan prevents mutually beneficial transactions between borrowers and lenders. It reduces labour mobility, housing turnover and investment, while providing diminishing improvements to systemic resilience.

Consequence #3

The third consequence, and perhaps the least discussed, is equity. Macroprudential restrictions increasingly allocate housing credit according to existing wealth rather than repayment capacity.

Households with accumulated housing equity, diversified assets or multiple income streams are naturally better positioned to satisfy increasingly conservative lending requirements. By contrast, first home buyers and long-term renters, despite stable employment and consistent rental payment histories, are more likely to be excluded from home ownership.

This outcome is not the objective of prudential policy. It is the unintended consequence of relying on increasingly prescriptive borrower-level restrictions to manage financial risk.

Further policy responses

Ironically, these distributional effects have generated further policy responses. As housing ownership has become increasingly concentrated among wealthier households, governments have sought to reduce investor participation through additional restrictions and taxation.

Yet investors are typically the most financially resilient participants in the housing market. Higher financing costs imposed on investors are frequently passed through to renters, while first home buyers continue to face tighter borrowing constraints. The result is a policy cycle in which successive interventions attempt to address the unintended consequences of previous ones.

The purpose of macroprudential policy is not to eliminate all risk. Nor is it to prevent households from making every poor financial decision.

Its purpose is to protect the financial system from systemic instability.

Those are different objectives. Australia has built one of the strongest banking systems in the world. The next policy question is whether the framework that achieved that outcome has been subject to sufficient review as the housing market has changed.

This is not an argument for weaker prudential standards. It is an argument for better governance.

The cumulative impact of Australia's macroprudential framework on competition, efficiency, equity and housing outcomes deserves the same level of scrutiny that has long been applied to financial stability itself.