Recently the Productivity Commission tabled a report on Housing Affordability. In summary, housing in Australia is becoming dramatically less affordable. Prices have been driven up by a speculative boom in these low inflation, low interest rates time. That boom has been encouraged by the effective halving of capital gains tax rates in 1999.
As Ross Gittins, sainted economics editor of the Sydney Morning Herald neatly summarises – "we're left with a system that taxes speculative gains at half the rate it imposes on honest labour." (hat tip to David from Manly for referring me to this article). Ross Gittins: Costello's part in property boom excesses
It remains to be seen how this speculative bubble works its way through the system. Who will lose their shirt in the process? What will be the effect long-term on housing affordability? It's not very clear what the outcome will be but there will be tears before bed time.
The pain of working this all through will demonstrate all too painfully why residential real estate is not a great investment - it is illiquid for starters and typically if you have an investment in a single property you are dangerously lacking in diversification and thus you have a high risk investment. I should have had a blog 2+ years ago when I was espousing my '10 Reasons why real estate is a lousy investment'.
As Gittins has previously written, the present first home buying (well trying) generation is the first to have been hindered not helped by their parent's generation. In the past wealth has moved down the generations assisted by shorter life spans and generally consistent housing prices. It's changed this time. The baby-boomers and beyond are living longer and are massively speculating in negatively geared real-estate (encouraged by a real-estate friendly tax system). The resulting speculative boom has shifted wealth from the young to the old.
Here are some more articles which illuminate this painful situation.
SMH: Housing eats up 40% of income
SMH: Call to tax profits on family home -- a suggestion to do as they do in the USA. Make interest payments deductable on the family home but apply capital gains tax on any sale.
Alan Kohler, SMH: How tax system egged on property speculation
The Economist has a string of articles on Australian Housing [registration required]