Australia's house prices are through the roof. How did we get here?

We all know house prices keep going up.

I do not need to tell you about the Australian property market. News publications are full of articles about the seemingly never-ending increase in house prices. I do not need to tell you house prices in Australia rose almost 17 per cent in the 12 month period ending in June this year. Nor do I need to tell you record low interest rates and first homebuyers’ grants increase demand and therefore prices.

Home ownership in Australia has continued to decline. Census data from 2016 shows the proportion of private dwellings owner-occupied that year was 67 per cent, the lowest since records began in in 1954. The figures are starker for younger adults. Between 1971 and 2016 home ownership for 25- to 34-year-olds fell from 57 percent to 44.6 per cent.

Principal Research Fellow at the Centre for Social Research and Methods at the Australian National University, Ben Phillips, says the large reduction in interest rates that began in the 1980s resulted in people "expecting to see low figures". He says the market became favourable for housing in the 1990s, and a reduction in capital gains tax and negative gearing meant people started to view housing as “a place where they could make money”.

The Howard government scrapped the indexation of capital gains and introduced a 50 per cent discount. It also boosted immigration and first home buyers grants which put further pressure on housing demand. Experts have slammed first home buyers’ grants as being ineffective at stabilising house prices. These first appeared in 1964 under the Menzies government at the request of the Young Liberal Movement, whose president at the time happened to be a young John Howard. The Howard government’s electorally motivated push to middle-class welfare also included family tax and private health rebates.

Phillips says it was during this time Australians started putting their money into property as an investment. He believes stock market crashes have potentially spooked some people out of investing in shares. “The average mum and dad investor understands bricks and mortar over shares," he says.

Can anything be done?

Perhaps, but it is unlikely. Again, with 67 per cent of Australians owning their own home there is not a lot of pressure on governments to put a lid on prices. Phillips says “having five or six years where house prices are stable and wages grow” would be a prefarable scenario. He also says “reducing negative gearing and discounts on capital gains tax, and restricting the kinds of loans people can get” could help to dampen soaring prices.

Is it still naive to aspire to Menzies ideal that “one of the best instincts in us is that which induces us to have one little piece of earth with a house and a garden which is ours?” Looks like the best thing we can do is hope.