Australia’s housing market is a giant inequality machine

Alan Kohler has labelled Australia’s housing market a “disaster” that has “fundamentally transformed society” for the worse after prices rose 960% since 1980.

Kohler sites data from economist Gerard Minack, which shows that while affordability in Australia has badly deteriorated, houses have actually become cheaper globally relative to income:

Global house price to income ratio

Sources: Bank for International Settlements; Minack Advisers.

This extreme house price growth, alongside Australia’s ballooning household debt load (ranked second highest in the world), means that “as far as the Australian economy is concerned, house prices are everything”.

Kohler also blames the nation’s broken housing system for increasing inequality, while noting that Australia’s high household wealth is largely meaningless because shelter is a basic need that we cannot simply cash-out:

Rising house prices do not create wealth, they redistribute it… It means the level of household wealth is both meaningless and destructive…

Sell your house and you have to buy another one, or your children do…

It’s destructive because of the inequality that results: With so much wealth concentrated in the home, it stays with those who already own a house and within families. For someone with little or no family housing equity behind them, it’s virtually impossible to break out of the cycle and build new wealth.

The growth in the value of land has fundamentally changed society, in two ways: First, generations of young Australians are being impoverished by the cost of shelter…

Education and hard work no longer determine how wealthy you are; now it comes down to where you live, and what sort of house you inherit.

It means Australia is no longer an egalitarian meritocracy: Material success is a function of geography and class, not accomplishment.

Kohler even gives yours truly a compliment for calling out the “housing affordability” crocodile tears pouring from the Coalition’s latest faux housing inquiry:

One of the pithiest comments came from the submission of Leith van Onselen of the newsletter MacroBusiness, who wrote, among other things: “Let’s get real and admit that this inquiry is a waste of time and taxpayer’s money”. And so it was…

What the standing committee’s report should have said is that the level of house prices and debt in Australia is a blunder, perhaps the biggest policy mistake in 50 years.

If Labor wins the election there will have to be another inquiry, but at least the same submissions can all be re-used.

Bravo Alan Kohler. I’ve been challenging Australia’s housing system since the inception of MacroBusiness, and have watched it go from bad to worse. It’s great to see that I am not alone in calling out the endless housing affordability bunkum.

I’ll see you at the next faux affordability inquiry. And then the one after that!

Unconventional Economist
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  1. MB readerMEMBER

    Yes Australians need to realise that just because their house is worth $1.5m doesn’t mean they are wealthy. What they are doing is deciding to invest their life’s efforts in an illusion rather than a choice of experiences that define their lives. Thus an impoverished lifestyle.

    • But think of the bigger picture, shows like the block and those somewhat attractive couples renovating dumps with a bit of paint of their face (to make it look like hard work etc..) and the K-mart inspired fitouts is something worth aspiring to.

  2. I am not convinced about the red line on that chart. Effectively it is stating that house prices are cheaper now than the 1970s/80s for much of the world except Australia. It is not true for much of the English speaking world and also HK, China, Indonesia (pre Covid) and possibly other places for it to be cheaper now. This site points out how unaffordable housing is in the Australian economic zone, but just Australia to another place name eg Canada and it is the same story.

    • Well it’s not saying they’re cheaper, it is just saying that the ratio to per capita income is lower everywhere else. It is possible that their incomes have outpaced house price growth but would be nice to validate that assertion.

      • Oz Deplorable

        Cheaper relative to income. I am not referring to nominal price as you rightly point out prices would have gone up.

  3. Grand Funk RailroadMEMBER

    One of the critical factors with the inequality generated by Australian housing is the triangulation of Australian society between

    1. Housing costs
    2. Tax avoidance
    3. Superannuation

    Take any one of the above and in the Australian context the other two become multipliers of the pernicious effect it has for Australian society and Australians. All three parts of the trilateral need to be dismantled or revisited in terms of both their relationships to other parts of the trilateral, and their implications for the Australian community. Our 1% masters will occasionally have us go through the charade of looking at one of them in isolation. As with the Housing Inquiry it is faux, it is Kabuki theatre kinds of stuff, and it is never ever intended to address social concerns.

    The answer to addressing Australian inequality, and the vast bulk of Australia’s economic malaise is

    1. Ensure that Housing is clearly stated to be a social good first and an investment class second, and where it is utilised as an investment class – for pension access purposes particularly – it should be taxed as an ‘investment’ (not as a social good).

    2. Ensure that all taxation concessions or write offs allowed by Australian accounting rules either are – or will achieve within a given life cycle of the ‘investment’ – economically viable. If they are not economically viable and can be shown over a given period of time (eg 5 years, but longer for some types of investment) then they are by definition tax farming and should be banned on that basis.

    3. Ensure that all superannuation is for pension purposes with the funds accumulated paid out as an annuity, not accessible as a lump sum, and taxed as an income at the receipt side unless the individual receiving them is not receiving an Age Pension.

    • I blame Howard and his boomer generation for this mess. A lot of those 3 areas of the economy are driven by him and Costello’s stupidity.

      But to fix the housing market is actually not too hard, just make the returns from investing in housing poor. And I don’t mean for average houses people live in, but once someone decides to invest in a second home as an investment, make the taxes on any gains brutal via the CGT (remove the discount), that way negative gearing can stay and you could probably almost remove the stamp duties also. Since flipping will become a pointless task. Instead people will only invest for the passive income of a rental income and for that to make sense prices will have to materially be lower.

      To me this is how I’d tackle the housing affordability monster. Basically make selling a high tax event for investors and make the market more liquid for single home owners and easier to access for FHBs.

      As for the Super rorts that’s another story, but again letting Super funds invest in residential real estate is stupid. Commercial ok, but residential dumb.

      And while we’re fixing the super nonsense let people invest in vintage cars via their Super fund, and be able to drive, own and maintain them. I mean at the end of the day it’s our money, we should be able to do what we like with it and I’d invest in a several marques that I think will bring excellent returns in future, but right now I can’t store it at home, I can’t store it with family and I can’t drive it until retirement age. Dumb dumb dumb.

      1 of my cars restored to a high standard, I believe will be worth $500k+ in future. I will probably sell it to help my son into his first home when he turns 18-21 etc.. but why can’t I have that some car and write off restoration costs are part of my Super fund investment? Instead I’m forced to go to all these sharks in the financial advisor industry who all want their cut or kick back.

      I believe I can invest better than those folks. So far my own investing has done far better for me than how they have managed my money. Of course I could be really lucky, but it’s besides the point, my money my decisions.

      • Agree with everything, but also, grandfather current rates for owner occupiers to allow them to pay down their PPOR as they were assessed as being able to afford them at that rate. THEN, give investors the boot, once and for all. Govt will have to fill the void of construction, but that’s fine because they won’t need to hand out cash for FHB/vendor stimulus any more.
        Another thing… Allow mortgages on classic cars as that’s what we’ll be living in, in future. Let the speculation begin!

  4. But the bogan keeps voting for this ponzi so I guess it will just have to blow up of natural causes, whatever they might be.

    • How? MB keeps repeating “Don’t hike now!” (while arguing the houses are overpriced).
      And without IR hikes, it won’t blow up.

  5. Snotty MillenialMEMBER

    If my username doesn’t give it away I’m well in the age group of those staring into the abyss of Australian property. The anxiety of getting a home (and trying to keep one) completely dominates the minds, discussion and smashed avo banter of anyone in the 25-40 age group. I don’t think people truly appreciated the social upheaval; When to marry, when to have kids, your career, where to start a career, finding the right partner etc. The last one is a biggie, unless one of the partners is in the top 10% of income earners, they’d better have a solid career track in place otherwise forget it. Stay at home mothers are a thing of an idyllic bygone past, unless the family is wealthy, it’s off to one of the many highly priced daycare factories full of forgotten kids with anxiety issues.

    If you’re not buying you’re at the whim of an absentee landlord who holds the balance of power.

    The housing enquiries are beyond comical. The giant bloated beast that is “Big Property” in Australia is simply too big to stop, and the property industry easily exceeds any other in lobbying power and reach. Indeed, many politicians have skin in the game. I’m reminded of the Ancient Greek god Kronos who became so greedy and powerful that he ate his own children. That looks civilized compared to this

    • Interestingly, the commentary on MB would support you unlike on The Australian which seems to be actually a true reflection of the entitled rabid right boomer bogan or Murducks robots. But at last election even the young bogans voted for the ponzi to keep going (though shorten turned out to be a useless campaigner). Anyway, vote for low immigration which looks like the Sustainability party. Trouble is now if RE is trashed so to is the barista n nail bar economy.

    • @Snotty, been in your position. I’ll be 40 this year, I bought my house 2 years ago prior to Covid and I was lucky enough to buy a house with a very small mortgage thanks to the fact that I’d worked for a good company with good stock options that performed well over the last 12 or so years. My wife and I had our first child nearly 2 years ago also, but at times I lived in despair as to the state of the property market and a horrid landlord.

      I always wondered why young people like me were not more angry at the situation and rioting about it. I certainly felt like rioting many times. I joined the Affordable Housing Party, which was shut down due to parliamentary changes that forced the party to require more members. Which just became more and more difficult.

      The gaslighting of older generations and politicians on both sides is also a major problem, Labor has very little in terms of affordable housing policy this coming election and ScoMo is beating the drum over his stupid scheme.

      I think a lot of social ills are due to the precarious housing market.

      My sister is looking to buy a place in the UK (still stupid expensive) but not as crazy as here. She’s not been as fortunate financially as I, so although I tried to help her find a place to buy in Australia it just became too hard as everything below $500k (even in remote areas) was being snapped up within a week or 2 of being on the market.

      At some point this will all blow up in our faces (as a society) if it hasn’t already.

      • Unfortunately I am becoming more and more convinced everyday that the future is feudalism, which was stopped for a few decades by the releasing of land and the invention of suburbia.

        The problem is that:

        – Eventually the debt will inflate away consolidating the current land “lords”.
        – This removes the impetus to sell as yields become positive for them.
        – The yield-to-price ratio won’t justify the investment for newcomers who need to use debt financing. Existing holders are fine since the investment was bought at the lower price.
        – Their profits can go into additional property to consolidate their power as a safe investment.

        Ironically as property ownership consolidates and released land quality declines good supply constricts making it more like a “very safe investment”.

        You see it in cities like Sydney already where the first question is “What suburb do you live in?”. Its a proxy for class. We discriminate not by race, religion, etc. We have “postcode-ism” in Aus.

        • Unfortunately I somewhat agree, hence why I decided to buy. I was more worried about the risks of being outside the market than being in it. The landlord of my house in Sydney (Five Dock) had bought the places in the 70s for a pittance. Probably around $20-30k, instead of renovating it, he bought another house in Haberfield leaving that place as an investment. Spending nothing on it in that time also. It’s now worth probably $2.5M at today’s prices for it’s land component only (650sqm) and remains capital gains tax free due to being grandfathered that way.

          For him the ongoing inflation benefits him and he owns multiple places in the Inner West of Sydney. I’ll never forget him moaning about land tax, such a greedy greedy man. Yet these are the people being rewarded in Australia right now.