Locked down,cashed up and with nowhere to go one year into the pandemic,a new Australian dream of housing evolved.

“It is no surprise that the pandemic has changed how we think about our homes,” Reserve Bank assistant governor Luci Ellis has pointed out.

In 2021,building construction boomed,house prices shot up to new highs and mortgages swelled as more Australians got into property for the first time,and households got smaller as people searched for more room.

Ten consecutive interest rate rises since May last year and tighter lending requirements have helped cool the market. But the pandemic exacerbated long-standing problems in the country’s housing market.

Reserve Bank governor Philip Lowe says Australia has high house prices because of the way we want to live.

“We have high housing prices because the price of land is high,which is embedded in each house,” he told the National Press Club earlier this month.

“It’s high because of the choices we made as a society – where to live,how to tax housing and to invest in transport. That’s the issue.”

But not everyone agrees.

Experts argue that tax settings have helped shift housing from being predominantly a form of shelter to an investment commodity,and planning and building restrictions have helped drive prices to highs well beyond basic economic understandings of demand and supply.

This masthead is continuing a series on whether the Great Australian Dream of home ownership is over,looking at the turning points that have led to the problems of affordability we have today.

Whose fault is it?

The price of land is one large factor – the Grattan Institute’s Brendan Coates says that since the 1950s,land values have accounted for about 80 per cent of the growth in home prices. But,he says,the driver of prices is actually low interest rates,more widespread access to finance,tax settings that favour investment,and booming migration.

Independent economist Saul Eslake has long had a bone to pick with negative gearing in particular. Supporters argue negative gearing encourages more rental properties,but Eslake says it exacerbates the imbalance between demand and supply.

With negative gearing bringing more landlords into the market,deregulation of the financial markets in the 1990s brought in lenders eager to cash in on the financial potential of homes.

Chris Martin,a senior research fellow with the University of NSW’s City Futures Research Centre,says this encouraged a new focus on leveraging your way into the property market as a way to increase wealth.

The Howard government’s decision to halve the rate of capital gains tax,aimed at encouraging people to sink money into the stock market,instead fuelled an influx of landlords seeking a financial windfall when they eventually sold.

“We’ve gone from a housing system that delivered people housing – now it’s become a system to get rich,” Martin says.

As those forces were at work encouraging a generation of ordinary Australians to treat property like a financial investment,governments dealt with affordability issues by using variations of home buyer grants to hand cash to potential home buyers.

Eslake has disliked first home buyer grants,and other policies that give prospective buyers more cash,since they were first introduced in the 1960s.

“I’ve had the view for the past 40 years that if Australians get more money to spend on houses,that leads to more expensive housing than it does to more housing,” he says.

Nicki Hutley,an independent economist,says these issues played out again during COVID.

“You see again and again governments keep trying to put on Band-Aid solutions by ‘helping’ on the demand side with things like first home owner grants or even shared equity schemes,those sorts of things,without addressing supply,” she says.

“So what they’re actually doing is making the problem worse,not better. And it’s not one government,it’s all levels of government.”

What about supply?

To add to those pressures,houses simply cannot be built fast enough to meet demand. But that was not always the case.

From the late 1940s to the 1970s,home building vastly outpaced population growth. It was driven by state and federal government wanting to boost supply to increase home ownership rates.

By the 1990s,that growth had started to slow,and by the new millennium,population growth surpassed the increase in housing stock.

Martin says the shift away from pro-ownership policies after World War II,including rent regulation that supported tenants and large-scale public housing programs,is the dark side of the housing policy story.

“We used to have a housing system that had an array of policies that supplied very high levels of home ownership. But over time,parts of that array have disappeared and the system that now exists actively works against home ownership,” he says.

Going into the pandemic,Australia had just over 400 homes per 1000 people,according to the Organisation for Economic Co-operation and Development – one of the lowest supplies of housing stock in the developed world.

In 2021,construction began on a record 231,220 new homes,but fierce demand – partially fuelled by various government home buyer schemes and record low interest rates – drove home values up by nearly 24 per cent that year.

Julie Toth,chief economist at property and mortgage transaction exchange PEXA,says Australia’s unique demographics drive demand for housing “ever upwards”. Its relatively strong population growth is coming more from new adult migrants than births.

“Housing demand is actually stronger than it would be if,for example,all of our population growth came from adding children. But because we’re adding adults,it immediately feeds demand,” she says.

It’s not just population growth. The average number of people in each household has been shrinking for decades as the population ages,falling from a high of 2.9 people per home in 1983 to a record low of just below 2.48 during the pandemic.

The Reserve Bank estimates a fall in household size in 2021 alone added 120,000 new households,even as the closed international border prevented any migrants.

“Bear in mind that we only build typically 150,000 to 200,000 new homes a year,” Toth says. “That’s all of one year’s worth of housing supply taken.”

The Reserve Bank now regularly tracks average household size,but at this stage no one knows whether the pandemic change in household size is permanent.

Australians left major cities in search of more space as lockdowns continued and working from home became a longer-term normal for many.

Head of the Productivity Commission Michael Brennan says only a minority group of workers can do their jobs from home,but technology changes should force a rethink of policies related to mobility and location.

“Remote work,online commerce,telehealth and other digitally enabled services are blurring the traditional distinctions between places where economic activity occurs:the home and the office;the shop and the warehouse,” he says.

He says zoning rules,which define what economic activities can occur in particular locations,should become more agnostic and permissive.

Rethinking where people can work and how houses,offices and warehouses can be used is important,because it has implications for productivity – that is,how much the economy can produce with a set amount of labour,technology and equipment.

Brennan says the growth in knowledge-intensive services such as finance and education has helped reshape the economic geography of our cities,as these jobs are usually concentrated in the CBDs and inner cities. He adds the structure of our mass transit systems has probably reinforced the issue.

Toth says despite Australia’s sheer size,desirable and well-located land is limited.

“The solution is trickier. Do we either recalibrate those cities so that more people can live in them? Or do we encourage a greater spread elsewhere?” she says.

Economist Hutley says this is a particular problem for local governments,which are caught between existing ratepayers and making space for new ones. “Clearly,that’s more problematic from government’s perspective,because for every winner with lower prices,there’s also a loser,” she says.

NEXT:Overcome NIMBYs and build where people actually want to live

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