$12.8 trillion property market ‘too important to fail’, report finds

Australian housing is worth $12.8 trillion, more than the sharemarket, the superannuation system and every household bank deposit combined, and has become so central to the economy that governments can no longer allow it to fail, according to new research examining Australia’s property market.

The seventeenth report in The Balance Sheet research series argues housing has evolved well beyond shelter to become the country’s largest industry, its biggest store of household wealth, the dominant source of bank lending and one of the most powerful influences on public policy.

Its conclusion is blunt: the housing system has become “too important to fail”, not because it cannot decline, but because governments repeatedly intervene whenever prices weaken.

The report arrives as Australia’s housing market loses momentum. National dwelling values have fallen for four consecutive months, including a 0.7 per cent decline in July, the steepest monthly fall since December 2022, leaving prices 1.4 per cent below their March peak. Sydney values have dropped 4 per cent over the quarter and regional markets have begun falling for the first time in three years.

Rather than pointing to a single cause, the report argues several forces are acting simultaneously. Parliament has approved the largest investor tax changes since 1985, the Reserve Bank lifted interest rates three times during early 2026, and governments continue supporting demand through schemes allowing eligible buyers to purchase homes with 5 per cent deposits. The combination, it argues, is supporting entry-level prices while borrowing constraints weigh on more expensive homes.

Ownership patterns help explain why housing remains politically sensitive.

Reserve Bank tax data shows about 2.3 million Australians own investment properties, 70 per cent own only one, the median investor is aged 51, and the proportion aged over 60 has more than doubled over two decades

Two-thirds of Australian households own the home they live in, making homeowners the largest voting bloc. The nation’s rental housing is owned overwhelmingly by individuals rather than institutions. Reserve Bank tax data shows about 2.3 million Australians own investment properties, 70 per cent own only one, the median investor is aged 51, and the proportion aged over 60 has more than doubled over two decades.

Institutional investors own just 0.2 per cent of Australia’s housing stock, one of the lowest proportions among developed economies, while foreign buyers, now prohibited from purchasing established homes until 2029, accounted for only about 1,800 purchases annually before the ban.

The report argues the housing market’s greatest vulnerability is no longer prices but debt.

Australians survived mortgage rates of 17 per cent in 1989 because the average new housing loan was about $71,000. Today the average new mortgage is around $735,000. The report calculates an 8 per cent cash rate would add about $1,860 a month to repayments on a typical new loan, while applying 1989 interest rates to today’s debt would push repayments to more than $10,000 a month.

“Every extra dollar of housing debt lowers the interest rate the economy can bear,” it concludes.

Reserve Bank research cited in the paper suggests a permanent one percentage point reduction in interest rates lifts real house prices by about 28 per cent over time, while each additional dollar landlords pay in interest raises rents by only about three cents. Instead, rents are primarily determined by vacancy rates, which remain exceptionally tight at 1.3 per cent nationally. Median rents have reached a record $705 a week.

The report breaks down the cost of a typical new house-and-land package, finding about $38 of every $100 goes to land, $33 to construction, and the remaining $29 to taxes, infrastructure charges, developer margins and professional fees

The study argues supply remains the system’s biggest weakness.

Construction productivity has fallen by half since 1995, the average home now takes 10.4 months to build compared with 6.4 months a decade ago, and the Housing Accord is projected to fall about 220,000 dwellings short of its 1.2 million-home target.

One of the report’s most striking calculations breaks down the cost of a new house-and-land package. About $38 of every $100 reflects land, including the planning and zoning premium the Reserve Bank previously estimated adds almost $489,000 to a typical Sydney home. Around $33 pays for the building itself, while the remaining $29 covers taxes, infrastructure charges, developer margins and professional fees.

“More than half of a new house is not a house,” the report states. “It is land scarcity and the cost of permission.”

That finding shapes its assessment of artificial intelligence and construction technology.

Robot bricklayers, AI planning systems, digital settlements and 3D-printed housing are already operating in Australia, but the report concludes the technology has streamlined administration rather than materially reduced housing costs. Even halving construction costs would lower the price of a typical Sydney house-and-land package by only about 17 per cent because land, not labour, remains the dominant cost.

The report also argues Australia’s housing policy has shifted further over the past 18 months than during the previous three decades.

Negative gearing has been confined to newly built homes, the capital gains tax discount replaced with indexation and a minimum tax on real gains, foreign purchases of established homes banned, and planning controls relaxed around railway stations and activity centres in New South Wales and Victoria.

Yet it identifies one major omission.

Real Australian house prices were broadly flat from the late nineteenth century until the post-war decades, suggesting today’s property market is a relatively modern phenomenon rather than an enduring feature of the economy

The family home’s estimated $51.5 billion annual capital gains tax exemption, the largest tax concession in Australia, remains untouched.

Historical evidence, the report argues, explains why governments remain cautious.

Real Australian house prices were broadly flat from the late nineteenth century until the post-war decades, suggesting today’s property market is a relatively modern phenomenon rather than an enduring feature of the economy.

While Melbourne experienced a dramatic collapse during the 1890s depression, Australia has not recorded a national housing decline exceeding 20 per cent in modern history. Every national downturn of more than 5 per cent has been followed by policy measures supporting the market.

The report points to New Zealand’s 18 per cent correction between 2021 and 2023 as evidence that substantial price falls can occur without triggering banking or fiscal crises. It argues Australia’s most important test will begin on 1 July 2027 when the new investor tax regime takes effect after what may prove to be a full year of declining prices.

Beyond prices, the report identifies climate risk as the next major challenge for housing.

It estimates 1.6 million households are already experiencing insurance stress, warns flood-prone properties are increasingly being repriced through higher insurance premiums, and argues climate risk is emerging “postcode by postcode, through renewal notices”, rather than through abrupt market events.

The report concludes that Australia’s housing market has housed a growing population, generated unprecedented household wealth and remained remarkably resilient over decades. At the same time, it argues the system has become increasingly difficult for new entrants to access.

Its closing assessment is unequivocal: “Housing made Australia rich, and housing is why Australians cannot afford Australia. The twentieth century was about building housing wealth. The twenty-first will be about deciding who gets to share it.”