The market started to slow well before the May budget announcement. That alone tells you the negative gearing and capital gains tax changes didn’t surprise anyone—the market had already priced them in.
But the bigger story isn’t tax. It’s construction cost, and now it’s lending rules.
Everyone says the answer to affordability is more supply. Build more apartments, prices come down. The problem is that the cost of building those apartments has stacked up to a point where the maths no longer works.
Let me give you a real example. I was at the gym recently talking to a colleague who’s worked for more than twenty years with one of the largest property developers in Sydney. And he told me that even at their volume—even as one of the biggest builders in the country—it’s costing them around eight and a half to nine thousand dollars a square metre, internal, to build a unit.
Think about what that means. A modest 55-square-metre one-bedroom apartment costs them somewhere between 470,000 and 495,000 dollars just to build. A two-bedroom unit, around 80 square metres internally, runs between 680,000 and 720,000 dollars. And that’s construction cost alone—before you add the land, before developer profit, before holding costs, before council contributions and all the rest of it. By the time you stack those on, you can see why the finished product has to sell for what it does.
Why is it so expensive? Because we have the most expensive labour we’ve ever had, there’s not enough of it, and the skilled trades we do have command a premium. On top of that, we’re relying heavily on imported products from overseas, and those costs have climbed steeply and stayed there.
So here’s the irony. What the government has effectively done, by pushing for all this new supply, is create a mini-boom in the construction industry—at exactly the moment when labour is scarcest and most expensive and materials are dearest. They’re trying to solve affordability by building more, but the cost of building is precisely what’s pricing people out.
You can see it in the finished product. A new apartment in Bondi Junction is now asking around 2.2 million dollars. An established unit nearby—sixty square metres, harbour views, better amenities—sells for 1.1 million. Per square metre, the new build costs almost double. Both rent for about 900 dollars a week. That’s roughly 4.3 percent yield on the cheaper one, 4 percent on the new one. Why would an investor pay double for the same rent? They won’t.
But there’s another wall now. From February this year, APRA has capped banks at writing only 20 percent of new mortgages to borrowers with a high DTI.
Let me explain what that is. DTI stands for debt-to-income ratio. It’s how much you owe relative to what you earn. You work it out by taking your total debt and dividing it by your gross annual income—that’s your income before tax. So if you’ve got 900,000 dollars in total debt and you earn 150,000 dollars a year, your DTI is six times your income. APRA’s rule says banks can only write 20 percent of their new loans to people at six times or higher. Below six is fine. Once you hit that ceiling, you fall into a restricted bucket—and if the bank has already filled its quota for the quarter, you may not get approved at all. That six-times ceiling is now the de facto lending limit for most buyers.
Here’s what that means in practice. To buy a one-million-dollar property with a 20 percent deposit, you need roughly 133,000 dollars gross income. With a 10 percent deposit, you need about 150,000 dollars. That puts you in the top 10 to 12 percent of all earners in Australia. The median income is 55,900 dollars. So on a single income, a one-bedroom unit is out of reach for roughly 88 to 90 percent of Australian earners.
For investors, it’s worse. Back around 2016, when low-doc lending was loose, investors could borrow 800,000 dollars on interest-only at around 4 percent. That was 32,000 dollars a year, completely offset against rental income. Now those loans are maturing. Banks won’t refinance into interest-only anymore. The investor has to switch to principal and interest repayments at 6.3 percent over 25 years. That monthly repayment jumps from 2,667 dollars to roughly 4,900 dollars. That’s an extra 2,233 dollars a month coming out of their own pocket—money they can’t claim as a deduction.
And here’s the squeeze: that same 800,000 dollar loan is already consuming a chunk of their DTI allowance. If they want to borrow more to add to their portfolio, they’re already half-way to the ceiling. Because banks can only write 20 percent of their loans to high-DTI borrowers, the bank’s quarterly quota fills up. Suddenly you’re not just competing on price or yield—you’re competing for your lender’s willingness to approve you at all.
So pull it all together. Construction costs are broken. Lending rules have tightened the gate. Investors are being squeezed out by refinancing pressure. More supply doesn’t fix affordability when it costs nine thousand dollars a square metre to build, when the buyer needs to be in the top 10 percent of earners to qualify, and when the investor who used to underpin the market can no longer afford to hold the debt. New apartments keep arriving with price tags the market simply can’t justify.
