A few months ago, I wrote that the Federal Government’s idea of housing affordability risked becoming wealth destruction.

Unfortunately, we no longer have to speculate about what that might look like.

It is happening.

Australian property prices have now been falling for six consecutive months. National dwelling values are more than 5 per cent below their peak, Sydney is down close to 9 per cent and Melbourne more than 7 per cent. Home sales have fallen sharply and confidence is deteriorating.

And perhaps the most disturbing statistic of all: around one in every 100 Australian mortgage borrowers is now estimated to be in negative equity — owing more on their mortgage than their property is worth.

That should stop every policymaker in Canberra in their tracks.

Instead, we seem to have convinced ourselves that falling property prices are somehow a social good.

They are not.

You cannot make Australians richer by making other Australians poorer

There is something fundamentally wrong with a housing policy that seeks to improve affordability by deliberately weakening demand for existing homes and suppressing their value.

The May Budget restricted negative gearing on future purchases of established investment properties and changed the capital gains tax treatment of investment. 

The policy intention was explicit: redirect investment towards new housing, reduce competition for established properties and give first-home buyers a greater opportunity to purchase.

But governments do not get to manipulate one part of an extraordinarily complex market and assume everything else will remain conveniently unchanged.

Housing is not simply another asset class.

For the overwhelming majority of Australian homeowners, their house is the largest asset they will ever own.

It represents decades of mortgage payments, sacrifice and work. It is the equity parents hope might one day help their children into a home. It is the asset many Australians intend to downsize from to help fund their retirement.

And for millions of Australians, it is their principal store of accumulated family wealth.

So I make no apology for asking the question:

How dare any government deliberately pursue policies designed to reduce the value of that asset without considering the enormous consequences for the people who already own it?

Governments should absolutely help Australians buy homes.

But making one Australian poorer does not make another Australian wealthier.

And destroying equity does not create a single additional house.

First-home buyers are becoming the collateral damage

The cruelest irony is that some of the people being hurt most are the very first-home buyers these policies were supposedly designed to help.

The Government encouraged young Australians into home ownership with deposits as low as 5 per cent, backed by a government guarantee.

Now prices are falling.

Recent analysis reported by The Australian found 1,143 first-home buyers using the government-backed low-deposit scheme were already in negative equity by September, up dramatically from just 89 in July. 

More than 100,000 scheme participants reportedly now have less equity than their original deposit.

Think about that.

The Federal government encouraged young Australians to borrow as much as 95 per cent of a property's value and then introduced policies specifically intended to force those property values down.

A first-home buyer purchasing an $800,000 property with a 5 per cent deposit begins with $40,000 equity.

A 5 per cent fall wipes it out.

A 10 per cent fall leaves them approximately $40,000 underwater before selling costs.

And telling these young people that property is a "long-term investment" completely misses the reality of life.  

People lose jobs. Relationships break down. People become ill. Families move. Businesses fail. Babies arrive.

And banks have been known to force sale on negative equity property. Because the borrower now owes more than the house is worth. Don’t for a minute think this won’t happen.  I saw it up close in Noosa in 2013 and 2014 with the then new Elysium estate. 

Negative equity takes away the freedom of choosing when to sell. And forced sales for less than the borrower paid, means they are stuck with the remaining debt while becoming renters again. Putting even more pressure on the rental market.

A cheaper house isn't necessarily a more affordable house

Tom Panos recently made another critically important point that is being almost completely lost in this debate.

If a property falls 5 per cent in price but a buyer's borrowing capacity falls 10 per cent, housing has not become more affordable for that buyer. It has become less affordable.

That is exactly the environment the Federal government has created..

Interest rates have risen, borrowing capacity has fallen and mortgage repayments have increased dramatically. 

The Australian reports that the additional interest burden on an average $731,000 mortgage from recent rate rises amounts to around $5,736 a year — potentially $172,000 over 30 years.

So what exactly has the aspiring first-home buyer gained?

The property might be $50,000 cheaper.

But the bank may lend them $80,000 less and their monthly repayments may be higher.

That is not housing affordability.

It is a shrinking market.

And tenants may pay an even higher price

Then there are renters.

The Government's attack on established-property investment assumes investors can simply be redirected into new construction.

Markets don't work that neatly.

Cameron Kusher has pointed to a dramatic slowdown in investor housing credit and argues the changes have damaged investor confidence rather than simply transferring investor demand into new homes.

That matters enormously.

Australia's rental market is overwhelmingly supplied by private investors.

Every investor who decides property is no longer worth the risk does not magically become a developer funding a new apartment building.

Some buy shares.

Some pay down debt.

Some put their money elsewhere.

And some existing landlords sell.

When an investment property is sold to an owner-occupier, one household becomes an owner, which is wonderful for them, but one dwelling also disappears from the rental pool.

With rental vacancy already desperately tight, reducing private rental supply is an extraordinary gamble.

There are already reports that rents have risen considerably more than the Government anticipated following the Budget changes. As I predicted in July they would. 

Again, the people supposedly being helped are the people paying the price. 

The economic consequences are much bigger than property prices

This week's Australian Financial Review Chanticleer column makes perhaps the most important point of all.

The biggest danger may not actually be falling house prices.

It is the collapse in transaction volumes.

National home sales reportedly fell 17.4 per cent in the three months to September compared with a year earlier. Brisbane and Sydney transactions were down around 25 per cent.

That flows through the entire economy.

When somebody buys a home, they generally engage a conveyancer, mortgage broker, building inspector and removalist. They may buy furniture, appliances, paint, carpet, curtains or landscaping. They employ tradespeople. Banks write loans. Agents employ staff. State governments collect stamp duty.

One property transaction generates economic activity far beyond the commission earned by the real estate agent.

When transactions collapse, all of that activity slows with them.

And there is another effect that economists have understood for decades: the wealth effect.

When Australians believe their home is increasing in value and their financial position is secure, they are more comfortable spending money.

When they watch $100,000 disappear from the value of their largest asset while their mortgage repayments increase, they behave very differently.

They stop renovating.

They postpone buying the car.

They cancel the holiday.

They don't replace the furniture.

They save.

Multiply that behaviour across millions of households and suddenly a housing correction becomes a consumer-confidence problem.

Then a retail problem.

Then an employment problem.

Then an economic-growth problem.

That is why I find the current policy direction so alarming.

Australia is already dealing with high interest rates, stubborn inflation, cost-of-living pressure and extraordinary global uncertainty. 

Deloitte is now reportedly forecasting an extended period of weak economic growth, with consumer confidence at levels not seen since the 1990s.

Why on earth would government policy deliberately add falling household wealth to that list?

Home equity is Australia's quiet intergenerational bank

There is another consequence rarely discussed in Canberra.

For generations, Australian parents have helped their children buy their first home.

They guarantee loans. They provide deposits. They release equity from their own homes. They downsize and give some of the proceeds to their children.

We talk constantly about the "Bank of Mum and Dad".

Where exactly do we think that money comes from?

In most families, it comes from housing equity.

Reduce the parents' equity and you reduce their capacity to help the next generation.

That makes the policy almost perversely circular.

We reduce the value of Mum and Dad's house in the name of helping their children buy a house — while simultaneously reducing Mum and Dad's capacity to help them do exactly that.

And then there is retirement.

Australians have been encouraged for decades to take responsibility for their financial future.

Pay off your home.

Build equity.

Downsize later.

Use the difference to supplement superannuation and fund your retirement rather than relying entirely upon the taxpayer.

That is responsible behaviour.

Destroying that equity doesn't eliminate the financial need of an ageing population.

It simply risks transferring more of that responsibility back to government. Which ultimately is the tax payer.

The solution was always supply

None of this means Australia does not have a housing affordability crisis.

We unquestionably do.

But the answer was never to manufacture affordability by making existing homeowners poorer.

The sustainable answer is painfully obvious.

Build more homes.

Release serviced land. Accelerate planning approvals. Reduce the taxes and charges embedded in new housing. Improve construction productivity. Encourage investment. Support sensible density and infill development. Fix infrastructure bottlenecks.

Increase supply.

Because real affordability comes from having enough housing for the population, not from manipulating the tax system until confidence collapses.

And what about Noosa?

Noosa is not immune from the national environment, but nor is it experiencing precisely the same market as Sydney or Melbourne.

We remain one of Australia's most desirable lifestyle destinations and there continues to be genuine buyer demand.

What has changed is the speed and depth of that demand.

Buyers are taking longer to make decisions. They are more price-sensitive, they have greater choice and they are considerably less inclined to chase a property simply because they fear missing out.

That means vendors need to be realistic.

The days when almost anything could be placed on the market at an ambitious price and attract immediate competition are behind us.

Current market data reflects that moderation. Noosa Heads properties are taking roughly three months or more to sell across several datasets, while Noosaville is generally moving slightly faster. 

The figures also show considerable variation between property types. This is an important reminder that "the Noosa market" is not one homogeneous market.

And that accords with what I am seeing on the ground.

Noosa is slower. Prices have softened in parts of the market. But good property realistically priced remains wanted.

Quality, position, presentation and realistic pricing matter more than they did twelve or eighteen months ago.

Prestige property, waterfront homes and genuinely scarce locations remain particularly difficult to replace. Noosa has geographical and planning constraints that simply do not exist in many metropolitan growth corridors. 

You cannot manufacture another Noosa Main Beach, another Noosa River or unlimited waterfront land.

That scarcity provides an important underlying floor to demand.

So I would not describe Noosa as a market in distress.

I would describe it as a market that has become more discerning.

And there is a very important difference.

Governments should create opportunity, not destroy security

Housing affordability is one of Australia's great social and economic challenges.

But we need to stop pretending there are no consequences when governments deliberately interfere with the value of the largest asset owned by Australian households.

There are consequences for first-home buyers who purchased yesterday.

There are consequences for renters.

There are consequences for retirees.

There are consequences for parents hoping to help their children.

There are consequences for banks, businesses, state government revenues, consumer confidence and ultimately the Australian economy.

A healthy housing policy should allow more Australians to accumulate wealth through home ownership.

It should not require existing Australians to lose theirs.

You do not solve a housing crisis by destroying home equity.

You solve it by building enough homes.

And right now, Australia needs to remember the difference.