Australia has 27 million residents and 11 million homes. On this, housing experts agree. But beyond this basic fact, views diverge. When experts disagree, it becomes very difficult for policymakers, who are not always steeped in housing economics, to design effective policies.

The recent decision to remove mandatory Lenders Mortgage Insurance (LMI) illustrates the divide. Some commentators view the government’s 5 per cent deposit program as a demand-side initiative that will push prices higher. Others consider it a supply-side measure that will reduce prices. Both positions only reflect part of the story.

Economics asks us to keep probing: and repeatedly ask “and then what?” This is the discipline’s strength, its ability to follow a chain of consequences, to uncover unintended effects, and to separate short-term impacts from long-term outcomes.

Short-term dynamics: the economics of the real estate market

In the short term, supply is fixed. Demand is measured by the number of buyers attending auctions or inspections. About 500,000 homes are sold annually out of a total stock of 11 million homes in Australia. The volume of listings does not change quickly, and most households remain in their homes from one year to the next.

Removing LMI lowers barriers for first home buyers. More households obtain pre-approval, attend auctions, and bid for properties. With a fixed number of homes listed for sale, prices rise. This is the economics of the real estate market, where demand fluctuates, supply is inelastic, and prices adjust quickly. This is the economics of real estate. More sales equates to more sales commissions.

Long-term dynamics: the economics of the housing market

Over the longer horizon, beyond a single election cycle, supply is no longer fixed. The supply of homes is not linear, symmetrical or consistent across time or geography. With time, supply of housing is somewhat elastic.

Demand for housing reflects household formation, driven by population growth and household size. Supply reflects the total stock of dwellings, which expands when new homes are built.

If the number of households increases without a corresponding increase in housing stock, scarcity drives prices higher until new dwellings are constructed. Once built, prices gravitate toward the cost of construction. In this context, who owns a home, whether an investor, a first home buyer, or a government agency, is irrelevant. Tenure affects distribution but not the aggregate balance of supply and demand.

Tracing the policy chain

Applying the “and then what?” test clarifies the LMI decision:

• In the short term, prices rise because more buyers compete for a fixed pool of homes.
• In the long term, demand is unaffected, because population and household formation are not affected by the policy change. But supply increases, because more first home buyers can access the new home building market and stimulate home building. Even if most buy established dwellings, this transaction frees up rental properties, and supply of homes remains constant.

Assume for a moment, a third of new home building is initiated by first home buyers, a third by investors, and a third by movers. This is close to the reality of Australian home building. On this basis, the LMI change could support building of more than 10,000 additional dwellings per year. Completion takes time, 6 to 36 months. As the new stock enters the market, year after year, the initial price rise is offset. Established homes become more affordable.

Broader implications

Between 2025 and 2030, Australia is likely to add demand for 1.2 million homes while only delivering about 900,000. NHSAC has drawn a similar conclusion. Prices will rise until the supply gap closes. Distributional pressures follow naturally from scarcity: the wealthy will always outbid the less wealthy for scarce essentials. Redistributing ownership from one group to another does not resolve scarcity. Only more dwellings, or fewer households, can solve the equity or price problems.

We will know balance has returned when rental vacancies exceed 3 per cent. At that point, rents stabilise, home prices flatten, and landlords must compete for tenants.

Conclusion

The lesson is straightforward. In the short term, housing policies play out in the real estate market, where listings are fixed and buyers fluctuate. In the long term, housing policies determine the stock of dwellings, and therefore the balance between supply and demand.

Removing LMI raises prices today but lowers them tomorrow. Policies that fail to distinguish between the short and long term risk repeating the same mistake: short-term relief at the cost of long-term shortages. Effective housing policy can be delivered by asking, and then what?

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