In his essay The Great Divide, Alan Kohler defines my tribe, the millennial generation, as anyone who was born after Bonnie Tyler’s “Total Eclipse of the Heart” was a number-one hit. Having entered the world just as 1982 made way for 1983, I consider myself to be an ageing millennial matriarch with first-hand experience of the problems highlighted in Kohler’s essay and therefore feel qualified to provide this correspondence.

Kohler observes that the year 2000 was the dawn of the “Great Divide” in housing. I turned eighteen at the end of that year and was far too busy enjoying the new freedoms that came with a driver’s licence and the ability to order a drink at the pub to be concerned with the matter of property. I intended to work hard, and the past had assured me that anyone who worked hard enough could buy a house when they were ready for such a commitment.

I was wrong. During the years that I heartily indulged in my youth and enjoyed the share house rite of passage, the market was shifting rapidly. By the time I moved out of my final share house on the eve of my thirtieth birthday, in 2012 – having handed over tens of thousands of dollars to landlords while trying to build my career – the median house price in Melbourne was about $530,000, more than seven times my annual salary at that point. And I was single, so buying solo felt impossible.

As Kohler explains, this has remained a challenge, with median house prices still at 7.4 times annualised average weekly earnings. In my case, cracking the property market meant making two critical decisions: moving home with my parents to do a “power save” at thirty, and ultimately purchasing an apartment at a price point that was significantly lower than the median dwelling price.

Kohler is right that the cost of housing is a serious problem in Australia, but more attention should be applied to what I believe is the biggest barrier to entry: saving a deposit. Most banks require a 20 per cent deposit along with additional costs. A 20 per cent deposit on the median $732,886 price that Kohler calls out is $146,577. And that’s just the deposit. Even if a first homebuyer or couple did manage to save that 20 per cent, once you add more than $39,000 in stamp duty, about $2000 in government costs, $1000 for conveyancing plus mortgage set-up fees, the would-be buyer(s) only have a 14 per cent deposit. Their loan-to-value ratio would be 86 per cent, making them a risky prospect as far as the bank is concerned; they’d therefore be slapped with a Lenders Mortgage Insurance (LMI) charge of approximately $9000, which protects the bank in the event of a default, not the customer. That “insurance” would likely be capitalised into the life of the loan, costing them a stack of additional interest for as long as they held the property.

In my view, the way that loans are structured is outdated and needs urgent review in light of the cost of entering the market. Kohler says that many young people may access the Bank of Mum and Dad to cover deposit shortfalls, but if you don’t have that (I didn’t), chances are you’ll cop the LMI rather than saving the full 20 per cent plus costs (this is what I did). I justified the LMI by putting a strategy in place that could benefit me in the long run. This meant buying an established apartment 25 kilometres from Melbourne’s CBD for about $300,000 with a deposit of less than 10 per cent in a red-brick block of just six. It was, frankly, pretty crap. But it was in a growing suburb, in a wide street full of nice homes, close to amenities. I hoped that it would rise in value over the course of six to eight years and enable me to take my next step into a freestanding home. Not in Melbourne, of course, don’t be ridiculous.

My second step up the property ladder came with a not-so-gentle shove from the pandemic. At the time, I was renting in the inner city and had a tenant in my property. They moved out during the first lockdown, leaving me covering both my own rent and a mortgage on an empty apartment. Thanks to a fortunate break in the form of a mortgage pause, I was able to sell the property and make a profit that would provide enough funds to purchase something larger. At that time, forty was looming and I wanted a permanent home. To secure one on a single income, I had to look beyond the city to regional Victoria, which was feasible only because I had the benefit of remote work.

I bought in Ballarat, 115 kilometres west of Melbourne. While I was proud to have finally made a successful offer on a weatherboard cottage, I was also moving away from family and friends. This was early in 2021. I knew no one. Snap lockdowns continued to hit throughout my first year there. I was desperately lonely, but this was the price I believed I needed to pay for my future security. Thanks to record low interest rates and wild demand for dwellings outside of the most locked-down city in the world, that price was high. My budget afforded me a property with a hole in the bedroom floor, some unplastered walls and one entirely inadequate heater for the frosty climate. But again, I bought with the dual purpose of secure accommodation and the potential for growth. I knew I could add value and make it an attractive asset if I ever needed to sell.

A year in, I’d painted and made several improvements, and for the first time in a long time I felt that I was finally getting ahead. And then, surprise! Thirteen interest rate rises. Cheers, RBA. I understood the emergency interest rates would eventually lift but never anticipated being hit this frequently this fast. Today my mortgage is about $1400 more than it was when I purchased the home. However, just as the hikes kicked off, I met the man who became my husband. He has not only made Ballarat home, he’s also enabled us to weather the cost-of-living battle together. Had our paths not crossed, I would be under extreme mortgage stress.

Kohler’s essay paints a clear and empathetic picture of the many struggles aspiring buyers and new entrants to the market face today. But the cost of property is only one piece of the greater social puzzle for millennials and the generations that follow. My husband and I are incredibly privileged to have two incomes, and that I managed to purchase our property at below the state’s median price in 2021. Our children are of the fur variety, and while we need to allow for food and occasional medical expenses, we do not bear the financial burden of paid care or education.

How can any young couple – without access to the Bank of Mum and Dad – not only save for a deposit, but then go on to cover the cost of a mortgage, bills, food and childcare? How do they manage costs when one parent must step out of the workforce for extended parental leave? Currently, parental leave is approximately $880 per week for just twenty weeks, and while parents will enjoy up to twenty-six weeks of paid leave by 2026, this small sum does not come close to compensating those shouldering the combined costs of early family life. The parent who takes on the primary caring role is also missing out on superannuation during that time, and potentially making this sacrifice intermittently for years, depending on the number of children they have.

Our support for young families is pitiful when compared with that in other nations. In Finland, each parent is entitled to 160 days of paid leave (more than fourteen months in total). The average across OECD nations in late 2022 was 50.8. Even when Australian primary carers do return to work, they must find a way to manage employment and care for their babies. Anecdotally, I know couples who are spending over $20,000 per year on childcare alone. The combined costs mean that raising a family is turning from a fairly reasonable dream into a luxury.

I believe many growing families will be forced to do what I did, moving a long way from their roots to the end of train lines and beyond for “reasonable” mortgages. If this trend continues, other social shifts must occur, including ongoing acceptance of work-from-home practices, strong employment opportunities and increased investment in outer-suburban and regional infrastructure, not just more housing.

Property prices are causing more than a great divide; there is now a cavernous gap between those who own their home and those who do not. I worry not just about our present circumstances but about how my generation will fare at retirement age. How will we accommodate everyone who was not fortunate enough to secure a home? A roof over one’s head should be a right, not a privilege. Yet, as Kohler points out, if most people have a vested interest in property prices rising for their own security, little will change.

The number-one hitmaker of 1983 was right when she sang, “Every now and then I get a little bit nervous / That the best of all the years have gone by.” Don’t those of us who were born at that time or in the years that followed know it.

Nicole Haddow

Nicole Haddow is a Victoria-based journalist and the author of Smashed Avocado: How I cracked the property market and you can too and The Ethical Investor. She was the executive property writer for the Australian Financial Review.

Just over ten years ago, I gave a talk to a dinner organised by the Henry George League (a small but enthusiastic group dedicated to the ideas promulgated by Henry George, a nineteenth-century economist and journalist best remembered today for his advocacy of a “single tax” on the unimproved value of land), which three months later formed the basis for a submission I provided to a Senate committee enquiry into affordable housing. Both were titled “Australian Housing Policy: Fifty Years of Failure.” If I were to give the same talk again – or write a similar submission to yet another parliamentary inquiry – the only things I would change would be to update the numbers I quoted in it and change the title from “Fifty Years of Failure” to “Sixty Years of Failure.” Because that’s what the policies of governments of all political persuasions, at all three levels – federal, state or territory, and local – have been. An unmitigated failure.

Alan Kohler was kind enough to quote from that talk in his Quarterly Essay. Indeed, Kohler went much further back into history than I did – to the mid-1820s. After reading his essay, I could almost speak of Australian housing policy as entailing 200 years of failure – except for the three decades or so after World War II when, as Kohler documented, Australian housing policy did succeed in meeting its stated goals of increasing home ownership and providing an adequate stock of affordable rental housing for those unable to attain home ownership.

To my way of thinking, one of the valuable contributions which Kohler’s essay makes to the contemporary debate about Australia’s housing crisis is in drawing out the history which shows that governments can – if they make the “right” policy choices – ensure that people can afford to buy or rent a home, even when faced with more rapid growth in the population (and hence in the “underlying” demand for housing) than we have experienced over the past eighteen months.

That is what they did between the end of World War II and the mid-1960s, when Australia’s population grew at an average annual rate of 2.2 per cent per annum (compared with 1.6 per cent per annum over the past twenty years), and the population of Australia’s eight capital cities grew at an average annual rate of 3.4 per cent per annum (because, in addition to the postwar “baby boom” and the massive immigration program, Australians were also moving from rural areas to state capitals in large numbers). Yet despite that, the average price of housing remained unchanged, as a multiple of average earnings, at about 3.5 times: and the home ownership rate rose by 20 percentage points – from 52.5 per cent to 72.5 per cent – between the 1947 and 1966 censuses.

That was possible because governments of both political persuasions, at both the federal and state levels, as well as local governments, focused on expanding the supply of housing and, beyond the bipartisan support for a big immigration program, refrained from adding to the demand for housing. Yes, as Kohler points out, there were ideological differences between the two major parties as to whether public housing should be sold to prospective buyers. But there was a bipartisan commitment to ensuring that the supply of housing matched the demand for it.

As Kohler goes on to show, that commitment began to waver, beginning with the introduction of the first program of cash grants to would-be first home buyers by the Menzies government in 1964. I don’t think it’s a coincidence that the home ownership rate peaked at the first census after that and has been declining ever since. At the federal and state levels, governments of both political persuasions have increasingly favoured policies which have the effect of inflating the demand for housing; while at the state and local level, governments have increasingly favoured policies which have the effect of adding to the cost or the difficulty (or both) of increasing the supply of housing.

In my view, history amply demonstrates that anything which allows Australians to pay more for housing than they otherwise would – be it cash grants to first-time buyers, stamp duty concessions for first-time buyers, preferential tax treatment for residential property investors, government guarantees for loans to people who have difficulty accumulating the required deposit, shared equity schemes, lower interest rates, or easier standards for determining loan eligibility – results in Australians paying more for housing, and hence higher housing prices, rather than in higher home ownership rates.

Yet, despite the accumulation of six decades’ worth of history amply demonstrating that point, governments of all political persuasions keep doing the same things – and, echoing Albert Einstein’s definition of insanity – expecting a different result.
Another of Kohler’s valuable contributions is to point out why. As he says, “housing is a cartel of the majority, with the banks and the developers helping them maintain high house prices with the political class actively supporting them. Everybody involved in this game – homeowners, banks, developers and state and federal politicians – wants house prices to rise for their own reasons.”

I’d put the same point slightly differently. Over the past thirty years, there have been, on average, about 112,000 first home buyers in any given year. Up until the moment they sign their purchase contracts and draw down their mortgages, they (presumably) want governments to do things that would restrain the rate of increase in property prices. But at any point in time, there are more than 6.2 million households – which probably means at least 10 million individuals (out of 17.7 million on the electoral roll) – who own (individually or with a spouse or partner) the dwelling in which they live – all of whom have a vested interest in governments doing things that boost the rate of increase in property prices.

One thing that successful politicians can do is to count votes. And they know that there are far more votes to be had from people who want property prices to keep going up than there are from people who want them to stop going up, or even to go down. And that, I’ve come to believe, is the real reason why what Kohler calls “Australia’s housing mess” will probably never be cleaned up by government policies: because a majority of voters don’t want it to be cleaned up. And politicians know that.

Saul Eslake

Saul Eslake is an economist, speaker and Vice Chancellor’s Fellow at the University of Tasmania. He is a member of the panel of expert advisers to Australia’s Parlia- mentary Budget Office.

For many years, I’ve been waiting for somebody to write the canonical treatment of Australia’s housing mess. Maybe a young Aussie Robert Caro would emerge and take a microscope to every corner of what is becoming our most urgent public policy problem. Such an account would no doubt amount to the literary equivalent of urban sprawl.

The Great Divide is neither canonical, such is the nature of word limits, nor is Alan Kohler, after a long and distinguished career in finance journalism, a millennial. But his Quarterly Essay is sober, necessary and broadly correct in its conclusions; and perhaps its message is best conveyed by a baby boomer like Kohler, whose vision is anchored in memories of a more functional past.

It is a fact of life that the cost of the structures we live in – or, more accurately, the land under them – keeps going up, even as the prices of the stuff we fill them with keep coming down. Over the past twenty-three years, house price-to-income ratios have doubled, from 3.5 to seven. According to the 2023 Demographia report, Sydney and Melbourne are the second and ninth least affordable cities on Earth.

Something that should be a national shame is, judging by the popularity of real estate TV and the size of crowds at weekend auctions, actually a national sport. As a friend quipped to me: America is number one in the world in healthcare costs, and it’s a disaster; Australia is (almost) number one in housing costs, and it’s celebrated.

So, what started the party? Or at least: what set off the most recent boom? The capital gains tax discount, Kohler answers. On my podcast in 2020, I discussed this possibility with Nobel Prize–winning economist Vernon Smith. As Smith explained, the story in the United States was similar; he identified the Taxpayer Relief Act of 1997, Clinton’s act, which exempted from capital gains taxes the first $500,000 of any home sale, as the trigger for the US housing bubble.

Howard’s 50 per cent discount was even more investor-friendly. By sweetening the deal on the resale value of housing, the effect of the tax break in Australia, as in the US, was to shift perceptions of what could be achieved with property.

For all this, Kohler’s astute historical analysis bleeds into a dubious economic argument; he writes as if the CGT discount is one of the – if not the – most important drivers of prices at current margins – a separate and less substantiated claim (indeed, a claim incompatible with some of the other research he cites).

If the CGT discount lit the spark, what has been fuelling the blaze? Kohler gives a comprehensive if not complete accounting of the myriad factors that have been swelling demand or dampening supply (missing, for example, are foreign investors). Haunting his analysis of the demand side are Australia’s one-million-strong negatively geared property speculators.

Kohler does not, however, get sidetracked in circular debates about bubbles. This is just as well. Demand and supply are like the blades on a pair of scissors.

Prices are set not by one half or the other but by their interaction. A corollary of this basic economic insight is that even if demand-side changes have been the proximate cause of the price rises of recent decades, as they surely have, their impact can be absorbed by the supply side.

In principle, that is. In practice, Australia’s housing supply is chronically inelastic.

If Kohler’s essay has a flaw, it’s that he doesn’t prosecute his own argument vigorously enough. He outlines the obvious or first-order harms of high house prices, namely declining home ownership, a “lack of security” and, importantly, rising inequality. But beyond that, his treatment of the downside risks is cursory. Two pages are given to discussing the decline of pet ownership among renters – a sad trend, to be sure, but in that passage he spills as much ink on cats and dogs (552 words) as on three of the worst repercussions of housing unaffordability: crippled productivity, macroeconomic fragility and falling fertility (553 words). It’s worth underscoring these harms in turn (to say nothing of the many other ills of housing unaffordability, such as the misery of long commutes and the environmental damage wrought by urban sprawl).

First, high house prices in our major cities stunt national productivity. Cities are engines of entrepreneurship. They facilitate specialisation and the sharing of information (what economists call “knowledge spillover effects”). As Ed Glaeser puts it in Triumph of the City, “ideas cross corridors and streets more easily than continents and seas.” By pricing our fellow citizens out of our most productive places, we don’t just deprive them of better wages; we deny our country greater wealth.

Second, high house prices make us macroeconomically fragile. In particular, excessive household debt coupled with high house prices render the risk of a balance sheet recession – the nastiest form of recession – at least plausible.

Australia has the second-highest household debt-to-GDP ratio in the world. Most of that debt is tied up in residential mortgages. While much less of our mortgage debt is held by subprime borrowers than was the case in the United States, marginal propensities to consume out of housing wealth don’t approach 0 until closer to the top 10 per cent of the income distribution anyway, according to research by economists Amir Sufi and Atif Mian. That is, 90 per cent of income earners can still be expected to tighten their belts if prices collapsed. So, we’re not exempt from this risk, however robust our position may seem.

Third, expensive housing is preventing couples who want to have kids, or have more kids, from having them. Children usually need bedrooms, and every extra bedroom means a bigger mortgage.

At the individual level, this is frustrating. At the societal level, it’s disastrous. As Kohler notes, our fertility rate is already below replacement level. This seeds structural imbalances wherein fewer workers must support more retirees. It undercuts productivity: our best economic growth models imply that population growth drives technological progress (since more minds means more Einsteins). And it frays the thread connecting society to its future – a condition that, unlike the others, can’t be postponed by mass immigration.

High house prices are a plague not just in Australia but across the Anglosphere. Indeed, their consequences are both so perverse and so pervasive that housing advocate John Myers and economists Sam Bowman and Ben Southwood coined a term, “the housing theory of everything,” to explain how housing unaffordability undergirds so much of the deep dysfunction we observe in the West.

What can be done? The Great Divide is really an essay about three great divides, all of which have conspired to put solutions out of reach. The first is the titular divide, between those who own homes and those who do not. For most Australian homeowners, housing forms the greater portion of their wealth. Since losses loom larger than gains psychologically, this group resists policies that put their nest eggs at risk with a passionate intensity that can’t be matched by aspiring homeowners.

Proposals for reducing house prices that are not accompanied by compensation to these owner-occupiers for lost equity – however undeserved that equity may be – are unlikely to shake the “generational tyranny” of the boomers (or the resistance of younger people who have managed to buy into the homeownership club before prices rose).

The second divide is between local residents and would-be residents. Local zoning rules, such as they are, give cranky NIMBY residents effective veto rights over new construction in their neighbourhoods.

There is an imbalance. Locals have both the capacity and the incentive to block new development. They can coordinate easily because they’re both physically proximate and few in number. And their reasons for enforcing the status quo, ranging from risk aversion to heritage preservationism (sincere or otherwise), are powerfully motivating.

On the other hand, non-residents looking to rent or buy in a city area would hypothetically be YIMBYs, but how can they organise to express their preferences? They’re spread across a city, or outside of it, if they even think of themselves as potential residents of a particular area at all. Moreover, the housing affordability costs of any one development not getting built are thinly spread and provide inadequate impetus for these strangers to overcome their coordination problems. This entrenches a fallacy of composition that hobbles efforts to increase housing supply. Any one rejection of new construction by NIMBYs at the local level may be both comprehensible and negligible. But scaled up to the national level, all those local decisions sum up to a housing shortage.

The third divide is, as Kohler laments, between two political impulses. The housing problem has become an ideological Rorschach test, in which the left, with its focus on equality, blames demand-side greed, whereas the right, with its belief in markets, prefers supply-side explanations.

But there are signs that the third divide – and hence the second – can be bridged. There is growing recognition on the political left that zoning is inherently inegalitarian. In the United States, liberals such as Ezra Klein and Derek Thompson have begun pushing for a “supply-side progressivism,” wherein the left redirects some of its energies from the demand side of the ledger to the creation of goods and services; in Klein’s words, it’s the “stupidly simple” thesis that “to have the future we want, we need to build and invent more of the things that we need.” Above all, that includes housing.

This new “abundance agenda”, with its wide political promise, is instantiated Down Under in the bipartisan YIMBY groups that have recently sprouted in Canberra, Sydney, Brisbane and Melbourne, and in their new alliance to form the Abundant Housing Network Australia.

There are pockets of hope, but a broad will is necessary to transform the housing situation. Can such consensus be found? I sense a deep pessimism on Kohler’s part. Given the seeming irreconcilability of the three divides, such pessimism is understandable!

But if we’re bound to fail anyway, why not permit ourselves to fantasise a little? How about land value taxes, like the Georgists have long argued? Kohler dismisses these out of hand, but taxing the gains – or rents – of agglomeration could be a highly efficient way to redistribute revenue to, for example, the regions – to say nothing of its ethical justification. Speaking of the regions, why not found new cities – or transform Darwin into an Australian Singapore – as Ken Henry suggested to me in 2023? Or if that’s too audacious, can we not turn to the age-old saviour: technology? Just as trains and cars opened up effective supply in the nineteenth and twentieth centuries, perhaps Zoom and virtual reality will do the same in the twenty-first. With the rise of working from home, can we convert office space into residential? To address the problem of the “missing middles”, why not allow street-level votes for gentle density, as has been proposed by YIMBY groups in England and Ireland – a win-win solution that can dissolve the second great divide? Or how about establishing home equity insurance markets, as Bob Shiller has proposed, to placate the NIMBY “homevoters”?

For Kohler, no solution is tenable until we purge ourselves of the belief that “house prices always rise and that housing is the best way to build wealth.” Ideally, we would engineer a flatlining of prices for the next eighteen years, until incomes catch up. A hard landing is off the table – wise, given the balance sheet recession risk.

Kohler is right that we must dislodge property from its pedestal, though this raises the question of whether the desired soft landing would be self-defeating. If speculators, already bleeding rental losses, then no longer expect capital gains, why wouldn’t they just try to sell – threatening a mass exit that could crash prices?

There is also the question of political will. Any attempted normalisation of prices by policymakers needs to be orchestrated with an heroic gradualism that outlives election cycles and the political temptations of pumping home equity.

But these nagging questions give way to a deeper one. Howard’s throwaway comment on ABC Radio in 2003 (“I haven’t had anybody shake their fist at me and say: ‘Howard, I’m angry with you for letting the value of my house increase’”) hints at a strange connection between our fixation on property and our lackadaisical attitude to productivity.

In an age of rising income inequality and stagnating productivity growth, have debt and equity become a palliative in Australia, as Raghuram Rajan argues they have in the US since the 1970s?

Thus, if solving our housing crisis requires abandoning the idea that property is a vehicle for building wealth, perhaps it also means embracing the notion that creating valuable ideas or companies is the most noble thing a citizen can do.

This would require a complete inversion of our national outlook. Under the tyranny of tall poppy syndrome, it’s as if property is the most excusable way to get rich in Australia: if you found a start-up, you’re long on yourself; but if you invest in property, you’re just long on Australia.

But we may not have a choice. For if pouring ever-larger piles of credit into unproductive assets is a sure-fire way of doing less with more, innovation has always meant doing more with less.

Joseph Walker

Joseph Walker is an Emergent Ventures winner and host of The Joe Walker Podcast. His background is in technology start-ups, most recently as director of operations at Y Combinator–backed Forage.