This report examines the evolution of macroprudential regulation in Australia and its interaction with housing finance, competition and housing outcomes. It does not argue that macroprudential policy caused Australia’s housing shortage. It argues that, in a market with structurally constrained supply, the cumulative tightening of housing finance has reduced supply responsiveness, worsened equity and impaired efficiency. It also does not call for broad credit loosening, nor for the relaxation of capital standards. It is a call for recalibration, periodic review and governance reform, so that emergency or precautionary measures do not become permanent constraints divorced from prevailing risk conditions.

Since the Global Financial Crisis, Australia has progressively layered Basel-aligned capital reforms with domestic macroprudential tools, including investor lending benchmarks, caps on interest-only lending, higher serviceability buffers and limits on high debt-to-income lending. A well-functioning housing finance system must also be efficient, competitive and capable of supporting broad access to home ownership and new housing delivery. This cumulative tightening of macroprudential and supervisory controls has unwound some of the benefits that flowed from the implementation of the Campbell reforms under the Hawke/Keating government. 

The report finds that this accumulation has altered the functioning of Australia’s housing finance system in three important ways.

First, it has reduced competition in mortgage lending by compressing credit assessment toward regulatory norms, raising compliance costs and limiting lenders’ ability to differentiate on risk assessment and pricing. The banking system has become less dynamic and less responsive to diverse borrower circumstances.

Second, macroprudential restrictions have impaired efficiency by denying access to credit to borrowers who have the capacity to service a mortgage at market prices. In doing so, they have prevented mutually advantageous transactions, reduced housing turnover and labour mobility and further distorted the housing market. 

Third, and most critically, the cumulative tightening of credit has had significant equity implications. Macroprudential restrictions allocate scarce housing credit by wealth rather than by repayment capacity. Households with existing assets, multiple income streams, or housing equity are better able to satisfy prudential thresholds, while first home buyers and renters, despite stable incomes, are disproportionately excluded. 

These equity effects have triggered further policy responses. As tighter lending standards have shifted housing demand toward more financially secure borrowers, political concern has grown about investor participation in the housing market. Subsequent macroprudential measures targeting investors have not reduced housing demand in aggregate but have reallocated costs. Higher borrowing costs imposed on investors are passed through to renters, especially in a supply-constrained market. At the same time, first home buyers face a double burden of higher rents and greater difficulty accessing finance. 

The report also addresses the common counterargument that easing access to finance in a supply-constrained market simply inflates house prices. While ‘let it rip’ polices would have this effect, the report demonstrates that housing supply responses are slow, uneven and lagged rather than absent. Restricting access to finance may dampen prices temporarily, but when applied persistently in a market with structural supply constraints, it risks entrenching undersupply and worsening affordability and equity over time.

A central finding of the report is that Australia’s macroprudential governance framework lacks explicit oversight of cumulative impacts and housing supply interactions. Regulators are acting consistently and rationally within their mandates, but those mandates were not designed for a housing market characterised by chronic supply shortages.

The report concludes that Australia’s macroprudential framework would benefit from reform, not relaxation. It calls for:

• an independent, eminent-person review of the cumulative impact of macroprudential restrictions on residential construction, competition, and equity of access to housing finance, including pre-2019 measures and Basel-aligned reforms; and
• amendments to the role of the Council of Financial Regulators to explicitly consider housing supply and equity implications when calibrating prudential settings.

Such reforms would strengthen governance, improve transparency and ensure that Australia’s macroprudential framework continues to support both financial stability and homeownership.

Download the full HIA Macroprudential Restrictions and Housing Supply in Australia

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