Housing

When you buy a house you buy two things: somewhere to live, and an asset whose price can rise or fall. A renter pays only for the first. An owner also gains or loses as prices move.

In Sydney and Melbourne, much of what buyers pay is for the land and its location rather than the building. A house that costs roughly the same to build in a fringe suburb and close to the city can sell for very different prices, because the land under it differs.

Because housing is an asset, its price depends on what buyers can borrow, what they expect it to be worth later, and how it is taxed, as well as on how many homes exist. The Grattan Institute estimated in 2018 that house prices had more than doubled in real terms over the previous 20 years, far faster than incomes.

This is also why housing is politically hard. Most Australian households own their home. Lower prices would help renters and first-home buyers, but would cut the wealth of the many households who already own, and could strain banks whose loans are secured on housing. Keep both sides in view as you watch: each video is partly an argument about who should bear the cost of change.

Few people buy a house with cash. They borrow, and when a bank lends, it creates a new deposit that the buyer pays to the seller (see Topic 3). So the price buyers can pay depends heavily on how much banks will lend, which depends on interest rates and incomes.

A simple example: a household that can put $3,000 a month towards interest could carry a $600,000 interest-only loan at 6 per cent, but $1.2 million at 3 per cent. When rates fall, buyers can bid more, and in a market where homes are scarce, prices rise.

RBA researchers trace much of the rise in prices relative to incomes from the early 1990s to two changes: financial deregulation in the 1980s, and the shift to low inflation, which brought lower interest rates and let households borrow more for a given income. They judged in 2015 that this one-off adjustment had largely run its course. A later RBA model found that low interest rates, partly reflecting lower world interest rates, explained much of the rapid rise in prices in the years before 2019.

Steve Keen goes further, arguing that the growth of mortgage credit itself drives prices. Most economists see credit and prices pushing each other along.

The supply argument runs like this. State planning rules and council zoning limit how many homes can be built, especially in established suburbs near jobs and transport. When demand rises, from population growth, higher incomes or cheaper credit, those limits mean prices rise instead of more homes being built.

RBA researchers Ross Kendall and Peter Tulip estimated that in 2016 zoning pushed detached house prices above the cost of supplying them by 73 per cent in Sydney, 69 in Melbourne, 54 in Perth and 42 in Brisbane. They were careful to say this is not how far prices would fall without zoning. The Grattan Institute estimated that building an extra 50,000 homes a year for a decade could leave prices 5 to 20 per cent lower than otherwise, and argues planning reform is the biggest long-run lever.

Building also depends on workers, materials and finance. The National Housing Supply and Affordability Council forecast in 2025 that Australia would build 938,000 new homes in the five years to mid-2029, 262,000 short of the 1.2 million target, citing labour shortages, high material costs, high interest rates and, in some places, restrictive planning.

Supply advocates rarely claim building is the only answer. Their point is that without more homes, other policies mostly change who gets the homes that exist.

Two tax settings come up in almost every housing debate.

• Negative gearing lets an investor whose rental property costs more to hold, mostly in interest, than it earns in rent deduct the loss from other income such as wages, lowering their tax.
• The capital gains tax discount, in place since September 1999, taxes only half the gain on an asset held for more than a year. It replaced a system that taxed gains after adjusting for inflation.

Critics such as Kohler argue that together these encouraged investors to accept losses while chasing lightly taxed capital gains, adding to demand. Others, including Murray, think their effect on prices was modest. The Grattan Institute, which favoured reform, estimated in 2016 that halving the discount and limiting negative gearing would leave prices up to 2 per cent lower than otherwise.

These settings are now changing, under measures announced in the May 2026 Budget and passed by Parliament in June 2026. From 1 July 2027, losses on established homes bought after 12 May 2026 can no longer be deducted against wages; properties already held, and new builds, keep negative gearing. Also from 1 July 2027, the 50 per cent discount gives way to an inflation adjustment with a minimum 30 per cent tax, for gains that accrue from that date; the change applies to most assets held by individuals and trusts, including shares, not only property; investors in new builds can choose the old discount instead. All three videos were recorded before these changes.

Housing markets also run on expectations. When buyers expect prices to keep rising, they stretch to get in before it is too late, and their buying pushes prices up, which seems to confirm the expectation until conditions change. That is what economists mean by speculation, and it is one reason house prices move in long booms and slumps.

Proposed fixes fall roughly into three groups:

• Add supply: planning reform, more construction workers and better building methods, and government building.
• Reduce demand driven by credit or tax: tax changes and limits on risky lending.
• Change who gets the homes we have: public or community housing, rent rules, and help with rent.

The videos favour different mixes. Kohler stresses tax and a long period of flat prices; Murray stresses public home ownership and rent limits; Keen stresses credit. As you watch, ask of each claim: is it about what caused high prices, about what would lower them, or about who should bear the cost?