While recent macroprudential measures designed to limit interest-only mortgage lending will certainly help to reduce financial stability risks in the housing market, it won’t help to address the housing affordability issue, said RBA Governor Philip Lowe.

In a speech delivered during the Reserve Bank Board Dinner on Tuesday, Lowe made it clear that reducing the demand-supply imbalances in the housing market, rather than tighter macroprudential measures, was the only solution to improving the housing affordability crisis.

“It is important, though, that we are all realistic about what these and other prudential measures can achieve. The underlying driver in our housing market is the balance between supply and demand,” Lowe said. “The various prudential measures do not address the underlying supply-demand issues. But they can reduce the risk from the financial side of the housing market while the underlying issues are addressed.”

On the demand side, Lowe said robust population growth, particularly in Australia’s largest cities, helped explain the astronomical property price gains in Sydney and Melbourne. “It is only in the past couple of years that the rate of home building has responded. This imbalance was compounded by insufficient investment in the transport infrastructure needed to support our growing population. Nothing increases the supply of well-located land like good transport links.”

This lack of a unified response to the population increase has only compounded the housing affordability issue. “Underinvestment in this area is one of the factors that has pushed housing prices up,” Lowe said. “Put simply, the supply side simply did not keep pace with the stronger demand side. The result has been higher prices.”

Demand, from the investors’ side, however, has been insatiable. A combination of lower borrowing costs and continued capital gains has encouraged more people to enter the market, pushing up property prices even further.

Ironically, considering the housing supply shortage in Australia’s largest cities, non-government think tank Prosper Australia estimates that about 300,000 of the country’s 9.8 million dwellings are left vacant each year. Many investors leave their properties vacant in order to time their exit from the market and cash in on their capital gains. Experts like economist Cameron Murray argue that such set-ups cause the housing market to fail in its primary social function of supplying secure and affordable housing to people.

Lowe concurred, noting that rising property prices have encouraged people to buy residential property as an investment, in the hopes of ongoing capital gains. “With global interest rates so low, many investors have found it attractive to borrow money to invest in appreciating residential property. This has reinforced the upward pressure on prices,” he said.