Australia’s financial system is strong. The Reserve Bank has said so again in its latest Financial Stability Review. Mortgage arrears remain low. Banks are well capitalised.

Households, despite higher interest rates, are continuing to meet their repayments. This is not a system under stress.

But it is a system that is increasingly locking people out.

While regulators have been successful in strengthening the resilience of the banking system, they have also fundamentally changed who gets access to housing finance.

Over time, lending standards have become more prescriptive, more uniform and less flexible. Serviceability buffers have increased. Debt-to-income limits have been introduced. Supervisory expectations have narrowed the scope for lender judgement.

Each of these measures can be justified in isolation. The problem is accumulation.

Taken together, they have shifted Australia’s housing finance system away from assessing risk and toward rationing access to credit. And when credit is rationed, it is not allocated evenly. It is allocated by wealth.

Households with existing equity, that own multiple homes and have multiple income streams are rewarded with more credit. Those without these advantages cannot access credit, even when they have the capacity to service a loan.

The result is that first home buyers, younger households, and renters with stable incomes are increasingly excluded from the housing market. Not because they are the riskiest borrowers. But because they are the least wealthy.

This is not a marginal effect. It is now a defining feature of the system. And it creates a feedback loop that policy has so far failed to recognise.

When marginal buyers are forced out of the market, the composition of demand shifts. It moves toward more financially secure households, including investors, who are better able to meet prudential thresholds and absorb higher borrowing costs.

This in turn fuels concern about investor activity. Policy makers respond by attempting to restrict investors. But these measures do not remove demand from the system they instead act to restrict the supply of homes, further exacerbating the inequity of the housing market. 

In a supply-constrained rental market, higher borrowing costs are passed through to tenants in the form of higher rents. At the same time, first home buyers face a double burden, paying more in rent while finding it harder to access finance.

The system does not become more affordable. It becomes more unequal. There is also a less visible consequence. Competition in mortgage lending has been reduced.

Australia’s financial reforms of the 1980s and 1990s, led by Paul Keating, were designed to increase competition and allow credit to flow to borrowers based on their capacity to repay. Lenders were able to differentiate, assess risk, and price loans accordingly.

That flexibility has been steadily eroded.

Today, lending practices are increasingly standardised, not because all borrowers are the same, but because deviation from regulatory norms has become costly to banks. Smaller lenders face higher compliance burdens. Product innovation is constrained. Credit is more likely to be denied than priced.

The system is safer. But it is also less dynamic, less competitive, and less accessible. None of this is to argue for a return to the excesses seen overseas prior to the Global Financial Crisis. Australia avoided those mistakes for good reason.

But there is a growing disconnect between the strength of the financial system and the restrictiveness of the policies governing it. If macroprudential settings are not eased when mortgage arrears are low, banks are well capitalised and households are broadly meeting their obligations, then it is unclear when they will be.

Policies designed as temporary safeguards risk becoming permanent constraints. And those constraints are not falling evenly. They are falling hardest on those trying to enter the housing market for the first time.

Australia has built a financial system that is unquestionably strong. The challenge now is ensuring it is also fair. Because a system that protects stability at the expense of access does not just manage risk. It entrenches inequality.

A central finding of a recent report by HIA into Macroprudential restrictions and housing supply 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.

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