The housing affordability crisis was a policy choice. The government is finally changing course

This week, the Australian Bureau of Statistics (ABS) revealed that in the first three months of this year, average dwelling prices across the nation grew by 2.1% and had increased by 10% over the previous year.

It was yet another instalment in the seemingly never-ending news of higher house prices, of prices rising faster than incomes and wages, of housing affordability becoming less of a reality for anyone born after 1975.

Housing unaffordability has always had a pretty obvious cause. In the late 1990s, then Treasurer Peter Costello appointed three business leaders – John Ralph, Rick Allert and Bob Joss – to review how capital gains were taxed. In a shock, they recommended that capital gains be taxed less.

And so, rather than taxing gains after accounting for inflation and thus taxing “real” gains, the Howard Government introduced a 50% discount. If you held an asset (like an investment property) for more than a year, when you sold it, you only paid tax on half of the profit you made.

Buy an investment property for $400,000 and sell it 4 years later for $800,000, you just got $400,000 tax free.

This set the housing market aflame. Investors flocked into the system knowing that now they could negative gear properties to reduce their tax, and they could easily make up the loss when they sold the property because half of the profit would be tax free.

In the 25 years before the introduction of the capital gains tax discount, the average value of dwellings in Australia was equivalent to around 8 or 9 years’ of average household income. Essentially, house prices rose in line with household incomes.

House prices rose, but not absurdly, and the Australian dream of owning your own home was taken as given.

Now, 25 years after the discount, the average dwelling in Australia is worth 17.3 years of average household incomes.

The dream is now a nightmare.

This is a policy we at The Australia Institute have been warning about and arguing against for literally the entire time it has been in place – our first report warning against the changes was published in the months before the legislation was passed in 1999.

Our research showed that the capital gains tax discount distorted the housing market. It meant people hoping to buy a home were competing against investors who had the tax system working for them.

Despite this being the clear problem, for a quarter of a century, successive governments have attempted to fix the distortion by adding more distortions – such as first-home buyer grants, Homebuilder, or even the 5% deposit guarantee for first home buyers.

All these did was add more money into the market that raised prices, doing nothing to prevent investors from using the tax system to outbid home buyers.

Despite the obvious cause, many conservative and business-friendly economists and real estate groups tried to gaslight the public into believing that the discount and negative gearing were not a problem.

One economist wrote in the Australian Financial Review after the budget that “The idea that house prices in Australia exploded because of the CGT discount is wrong, intellectually lazy, and a classic example of the post hoc ergo propter hoc fallacy.”

Well, in what will not be a shock to anyone who has ever attended an auction, the changes made by the government in the May Budget to end negative gearing except for new builds and to return capital gains tax to the pre-1999 method with a 30% minimum tax rate have had an immediate impact.

Media are now quoting economists and banks suggesting the changes might cause a 10% fall in house prices.

This is being reported as some great calamity, but all it would do is take prices back to December 2024 levels. It would take the value of average dwellings from $1.1m to $1m.

It would take them from being worth 17.3yrs of average income to 15.6yrs – still well above the 9 years’ worth they were for most of the 1980s and 1990s.

The changes show that governments have always had the ability to fix housing affordability; they have merely chosen to favour investors and the wealthy instead.

But governments can change the country for the better or worse. Failure to act for 26 years on housing affordability has left many Australians renting for most of their adult lives and led to for the first time since WWII, most Australians in their early 30s not owning their own home.

The path to undoing the damage will be long, but finally there is hope that no longer will the housing market be treated as a place to increase wealth rather than a place to find a home to live in and grow a family.

This week it was reported that investor loans by Westpac had fallen 20% in the month, and a property investor bemoaned to a business conference that “these tax changes are a status war. They are killing residential investment and encouraging owner-occupier demand”.

Oh gosh, a government doing something to help home-owners rather than investors?!

Yes, it is possible, and that’s why we keep pushing for changes that make the economy fairer and our society better.

Good policy is a choice, and it’s why we keep pushing for better choices.