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Should housing home people or money?

For many, the Australian dream of home ownership has been drifting out of reach, with ownership rates trending down at least since the 1990s. Why does price growth remain so high? This is one of Australia’s most pressing public policy questions.

Most economists – including this one – agree that Australia should have more housing supply, which would ease prices and rents. Local governments decide zoning but do not factor in the broader economic benefits of supply growth. This is a strong justification for the Federal Government’s National Housing Accord, which incentivises state governments to work with local governments to lift supply. There are also costly and arguably ineffective bottlenecks in construction regulation.

Policy that addresses these issues is clearly beneficial. But the presence of supply constraints does not necessarily imply that they are the sole – or perhaps even the main – driver of Australia’s affordability issues. If other factors matter, then to be effective, housing reform may need to extend into other areas like tax settings and welfare-payment eligibility.

The aggregate trends in housing costs indeed suggest looking at other factors. Rapidly rising rents are a post-COVID phenomenon; over the longer term, worsening affordability is more a story of purchase prices. Relative to inflation, average rents across Australia’s capitals are now lower than in 2010. A sizeable difference between price and rent growth goes back to the 1980s.

Something is contributing to high price growth that appears to be having not much effect on rents. It is difficult to argue that rents are immune to supply shortages. Prior e61 work presents evidence that rents responded to shifts in supply-demand balances when COVID hit.

Some US research has modelled housing supply as affecting prices more than rents because supply shortages raise expectations of future rent growth. This boosts the expected profitability of buying, and therefore the price people are willing to pay. In Australia, price growth has remained strong despite slow rent growth. Here, this explanation would require that expectations about future rent growth remained high despite low growth eventuating.

The growth difference between average prices and rents is not due to different locations of owner-occupied and rented housing. In fact, in Sydney – where housing supply is arguably most constrained – rent growth is furthest below price growth. In NSW and Victoria, rent growth has been a little higher outside the capitals than in them. At face value these patterns differ from the US, where rent growth has been faster in supply constrained areas.

These price and rent growth patterns can be reconciled by viewing housing as a financial asset, as per the workhorse user-cost model of housing prices. This seems appropriate because Australians do tend to see housing as a way of building wealth. Financial asset prices are driven by expected future returns: the more money someone expects to make from the purchase, the more they’re willing to pay. Access to credit can also play a role, if people are willing to pay more than they can afford, and their ability to pay changes. Recent Australian research concludes that past regulatory limits on mortgage lending lowered housing prices.

The user-cost model highlights that financial returns from housing primarily comprise capital gains from price growth, minus mortgage interest costs, plus rental income (which for owner occupiers is an avoided financial cost). If prices are rising much faster than rents, it suggests that expectations of capital gains are rising, or expectations of interest costs are falling, or ability to borrow and spend is expanding.

The reality is probably a combination of all three. On capital gains, US research models how shifting beliefs about future housing returns can have sizeable price effects. Regardless of how high prices get, there seems to be no shortage of advice to young people to get into the market to not get left behind. On interest costs, some Australian research has attributed rapid housing price growth to the long-term decline in interest rates. On credit, the ability of Australians to pay deposits – and to borrow the rest – has risen as household incomes have grown, and as past housing price growth has generated housing wealth that can be further borrowed against.

What’s the solution?

Tightening monetary policy to lower housing prices would most likely do more harm than good, by also depressing general economic activity. Alternatively, restrictions on borrowing would hit those without mortgages already locked in, and therefore unequally affect first home buyers, who the policy would be most aimed at helping. Current policy is intentionally doing the opposite – relaxing borrowing constraints for first home buyers.

Other ways of targeting expected future returns are worth consideration. Relative to other investments, Australia’s tax on housing is generous. Owner occupiers have a full capital gains tax exemption. Investors receive a 50 per cent discount on capital gains tax, which also applies to other investments like equities, but may have more effect in the housing market where leverage and returns on equity are higher.

Australia’s tax settings around negative gearing are also lower than other countries such as the UK, US and Japan. The Age Pension system also incentivises pensioners to hold wealth in housing, which reduces their measured wealth for means testing.

Tightening these tax and transfer settings could lower housing price growth by reducing how much wealth growth people expect from housing. These tax settings also favour the wealthy. Renters that cannot afford to buy their own home have no access to the tax-favoured investment vehicle that is housing.

Reforms in this direction would be politically difficult without a cultural shift in how Australians relate housing to wealth. But the trade-off may have to be faced. The desire to build wealth through housing price appreciation feels fundamentally at odds with the desire for future generations to be able to buy homes.

 

Nick Garvin is a Research Manager at e61 Institute specialising in microdata research for economic and financial-system policy.

For more information, please reach out to Nick via email at [email protected].

 

28 Comments
Hiker
September 30, 2025

To those who said that houses are unaffordable for young people, I agree with you. However units are. I paid $400k for an investment unit in a lovely double brick 1920s building with a garden in Sydney’s lower north shore 23 years ago. As of today, it’s worth about $850. My worst share has outperformed this unit.

michael
September 30, 2025

40 yrs ago, I was in my twenties, I met a retired lady at a party. She was the landlady, who lived next door.
She told me "everyone needs 2 houses: one to live in, one to live off."
Housing has long been about money. The balance has changed over time.

Indy
September 29, 2025

Lots of (I presume) middle aged and older people talking and postulating here, repeating theories from economists based on market observations and data from times when things were DIFFERENT to now. Simplistic "market forces" arguments that include only Supply and Demand of the houses themselves are at a loss to explain the skyrocketing prices of houses and... well, everything else... when individual buyers have less and less cash. Because those economic equations are rooted in data from a past where most home purchases were done by individuals, not companies and investment trusts. Entities whose deep pockets are primarily owned and funded by the very wealthy (tens to hundreds of $Ms of assets). "Institutional investors do not yet control a large market share in housing, but analysts writing at MetLife Investment Management suggest they could by 2030." (CNBC report 2023). In "western" economies over three last few decades wealth has decreased for low and middle income citizens while the top 1% have seen a massive increase. In the USA the proportion of housing owned by corporates (proxies for the very wealthy) is growing significantly, raising both rents and also the cost of houses. Talking about just Supply and Demand of houses while ignoring the increasing effect of the Supply of money wielded by the very wealthy is blinkered and naive. Everything I've said is backed by facts which you can check with a simple search and less time than it takes to make a cuppa. Apply Occam's razor to what you see. Is it more likely that working immigrants who arrive here with little wealth and with no credit history to take out a housing loan are the ones bidding up the prices in the housing market, or is it well funded corporates? And before you think that corporate investment providers a growing benefit for "mum and dad" super investors ask yourself- if that was true, then why does the country's asset wealth keep increasingly moving towards the very wealthy? Don't the people who own the most wealth also own most of the corporations? Wealth inequality has already distorted the market beyond recognition and beyond simplistic "classical" Laws of Economics.

Dudley
September 30, 2025


"why does the country's asset wealth keep increasingly moving towards the very wealthy":

The wealthy become wealthy by out saving the poor.

The poor earn too little, pay too much rent or mort-gage, spend too much and consequentially save too little to grow their wealth at the same proportional rate, or greater, as the wealthy.

Those with access to the 'Bunk of Dad&Mum' most often do not exploit the potential to save 80% to 90% of income to buy a home in around 4 years, without a mort-gage; often taking gifts from and endangering the 'Bank Of Mum & Dad' instead.

GeorgeB
September 30, 2025

I think what Dudley is saying is that many people do not have the mindset to become wealthy-they are the sort that are not sufficently motivated to improve their lot in life. This is one reason why many migrants have done well even if they arrived here with nothing more than survival skills sharpened by deprivation or lack of freedoms we have always taken for granted.

Patrick Kissane
September 29, 2025

Following pressure by a) public servants, b) public service unions and c) the government, recruitment to the public service is now largely restricted to entry-level or low-skilled jobs. Thus the high-paying jobs are restricted to existing public servants.
It seems this policy has now been extended to a national level i.e immigration intake. Immigrants are now given temporary entry only e.g. temporary skilled visas, working-holiday visas, education/working visas. Most visas granted now are for low-skilled work.










Petet taylor
September 26, 2025

A recession usually solves asset bubbles and speculation along with inefficient businesses and shifts focus back to customer service. Constant goverment borrowing and policy to starve off a recession is the result of where we are today.

SteveOh
September 26, 2025

Houses are for living in , not investing in . That way they become homes . Change the tax policies to reflect this - agree with Neil & Geoff D.

Bob Burford
September 26, 2025

Its simple supply and demand.
If you bring into the country 1million people plus in 3 years and only build approximately 600,000 homes, prices are going to sky rocket. Add to it the government charges to build a home, union labor problems, reduce the working week hours, then add to it the reels of government red tape and BOOM.
Answer, Reduce net migration to 100,000, ensure 50% of them are tradespeople and BINGO problem almost solved.

John
September 26, 2025

Then ensure the remaining 50% of immigrants will be productive, by banning family reunion immigration. Allow tourist visas, but don't give residency rights to those who will not be working here paying substantial taxes or will end up on welfare. If you miss your extended family too much when you come here, simply return to your original home.

Dan
September 28, 2025

Adding to the supply/demand equation, by reducing the incentive to invest in housing as the author is suggesting will affect the supply side, BOOM.

TassieChick
September 26, 2025

Set a minimum ownership time on a property (house) before it becomes PPOR exempt. This will stop the speculation turnover using the one year ownership rule. Suggest 5 years before PPOR become CGT exempt.

James#
September 25, 2025

Let's face it, governments (Commonwealth & State) don't really want to fix the housing problem! It's politically damaging to even propose, let alone actually make major changes! At best they do something to give the appearance they care about young, first home buyers and ignore the myriad of economists who declare they are only making the problem worse. Bipartisan support will be non existent. Too easy to create a political wedge. Add in vested interests of many in the political class owning multiple properties and the vicious backlash that would occur if you altered the negative gearing, CGT and PPOR tax exemptions and it's check mate. Added to this mess is the fact that Australia is a very high cost country for everything now, especially for building!

Hiker
September 30, 2025

I don’t know why my reply to James# was posted under Gruber. Hence reposting.

I agree with James# Just want to add that
1) with building cost especially labour cost so high, it would be impossible bring down house price. Labour and material costs used to be 50/50 roughly. Now the labour costs far outweigh material, based on my recent renovation. I do buy quality materials. How do you bring down labour cost without a depression (don’t think a recession would do the job).

2) With so many people’s wealth tied to property prices, any measures that crush house prices will also crush economy. It’s not only a political suicide but an economical suicide.

Young people without a job that Joe Hockey told them to get would need Bank of mum and dad finance. We are early retirees and have recently upsized (yes upsized!) to a larger house with two separate living areas and two kitchens. We may never need it but good to be prepared.

Rob
September 25, 2025

Any Economist worth their salt knows there are two sides to the equation - Supply AND Demand. In your "solutions" not a single mention of cutting Demand! Totally ridiculous - when something is out of control you first "stabilise" the problem ie cut immigration, get it under control, reset and go again from a sustainable foundation! Not rocket science!

Or perhaps all my Economics teachers in the late 1960's had it wrong...

Jason P
September 25, 2025

Housing isn't an unsolved economic problem. It's a really tricky political one. Even policy suggestions — such as limiting the no. of tax deductable investment properties or capping deductions — are met with very negative responses from most of the electorate. Very hard to see how anyone really has an incentive to solve.

Neil
September 25, 2025

I think that a house should be regarded as a home! Not an investment vehicle for the so-called wealthy that is those with the ability to borrow against other real estate assets to buy multiple houses with little or no equity in the purchase cover the costs by rent subsided by income tax relief. A lot of the affordable suburbs are being exploited thus cornering the market of first home buyers. Also, when the properties are sold tax is only paid on 50% of the Capital Gain on the original purchase price. A great investment when there is no equity in the property or when the Capital Growth allows the purchase of another. The Tax on property investment should be revised but as a recent Firstlinks article the lawmakers are in on the deal.

Geoff D
September 25, 2025

I agree with you Neil. I've been harping on for years that Australian tax policy re housing has been deficient since time when. It has now become very difficult to resolve. We should be taxed in some way upon the sale of our homes so that funds are removed from the private investment system and used by governments to provide cheaper housing alternatives. Here in South east Queensland we see arrivals from the southern states who have made heaps of tax free money down there and it all goes into overpriced property up here, just accentuating the problem. Of course, the population at large would not like being taxed like that. Nor would the politicians with vested interests! Very difficult!

GeorgeB
September 25, 2025

With the cost of building materials and labor soaring in recent years several builders have gone on record saying that the price of established property must go up not down to make building new housing viable. So if the aim is to increase supply the last thing you want is for prices to start falling.

James Gruber
September 26, 2025

GeorgeB,

Not so sure about that. If house prices go down, that would cause an economic downturn or recession, would undoubtedly bring down building materials costs too, probably at a faster rate.

With rising home prices, the supply response will always lag by several years.

Hiker
October 01, 2025

I agree. Just want to add:
1) with building cost especially labour cost so high, it would be impossible bring down house price. Labour and material costs used to be 50/50 roughly. Now the labour costs far outweigh material, based on my recent renovation. I do buy quality materials. How to you bring down labour cost without a depression (recession wouldn do it)?

2) With so many people’s wealth tied to property prices, any measures that crush house prices will also crush economy. It’s not only a political suicide but an economical suicide.

Young people without a job that Joe Hockey told them to get would need Bank of mum and dad finance. We are early retirees and have recently upsized (yes upsized!) to a larger house with two separate living areas and two kitchens. We may never needed it but good to be prepared.

Dan
September 30, 2025

Yes totally agree, a builder/developer needs to make a profit just like any other business, so existing property needs to go up to encourage people to buy new, otherwise why would the builder bother, in the meantime more demand remains on the existing property stock

Steve
September 25, 2025

A growing section of the electorate thinks Andrew Hastie MP has a good idea about what a key part of the problem is.

Michael
September 25, 2025

Reducing the high prices of housing blocks would go a long way to reducing house prices. This won't happen though as councils need high land prices for rate income and governments for land tax income.

Aussie HIFIRE
September 25, 2025

Start including more of the family home in the assets test for the age pension and see what happens to house prices, as well as recipients moving from large homes to smaller ones thus freeing up housing stock for young families.

Michael
September 25, 2025

Looked at moving to a smaller house but agents fee and stamp duty costs were over $90k, so decided to stay put. Proposals to remove stamp duty and replace with a yearly land tax is also flawed as the amount increase each year as land prices increase. How many home owners could afford an extra $5k per year in costs on top of rates as many proposals are suggesting.

Aussie HIFIRE
September 25, 2025

If an extra $500k of the house value starts getting included and costs couples $22.5k pa in income then they will likely start changing their mind.

Dudley
September 25, 2025


See your 'Family Home in the Assets Test' and raise you 'Full Universal Age Pension'.

 

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