High-priced homes have broken the intergenerational bargain

Young Australians’ hopes of well-paying jobs and starting a family are being frustrated by a dysfunctional housing market, the head of the Productivity Commission has warned, while arguing that the nation’s long-standing “intergenerational bargain” was fraying.

Danielle Wood, who is due to present evidence to a parliamentary inquiry into the state of the property market this week, said that decades of property prices rising far faster than incomes had left young people facing a bleak future and an effective fall in living standards.

The government has argued that its hotly contested changes to capital gains tax and negative gearing concessions in the budget are aimed at improving the chances of younger people getting into the property market.

House prices were already falling in Sydney and Melbourne before the changes, but tax and industry experts believe values will slip further over the rest of the year.

Wood said it was clear that the 30-year surge in house prices had disproportionately hit younger Australians, who were increasingly frustrated by an economy that was not working for them.

High-priced housing and modest wage growth meant younger Australians were denied choices – from where they worked to whether they started a family – that previous generations had taken for granted.

“What we are seeing is much lower rates of home ownership among people in their 20s and 30s than we had in the past,” she told this masthead.

“This is building a sense of frustration as these people don’t have the same access to the Australian dream as people in the past had.”

Commission research has found that two-thirds of people born between 1976 and 1982 earned more than their parents at the same age. But this improvement in income had effectively ended.

People born in the 1990s are the first age cohort to have experienced almost no growth in their incomes compared with people born a decade earlier at the same age.

Between 1997 and 2025, property values grew three times faster than wages, making it much harder to buy a property. Even when possible, the purchaser was saddled with an increasingly large mortgage.

According to the commission, income growth for young people has stalled, while their “wealth and their housing outcomes have gone backwards”.

Wood, who previously headed the independent Grattan Institute think tank, said the commission had not modelled the impact of the government’s changes.

But she said that previous Grattan research was largely in line with Treasury analysis, suggesting that house prices would grow about 2 per cent less than if CGT and negative gearing had remained unchanged.

Wood also said that claims by critics and supporters of the changes’ overall impact were overblown.

“The big lever is supply. We need more supply,” she said.

The commission is due soon to release an interim report into the nation’s network of planning and housing regulations, which critics argue have contributed to the shortfall in new homes.

The government is already tens of thousands of properties behind its target to build 1.2 million homes between mid-2024 and mid-2029.

Building approvals have climbed by more than 9 per cent to 202,000 over the past 12 months, due in large part to a strong pick-up in the number of houses given the green light for construction, but interest rate settings and the government’s tax changes are expected to slow demand.

That softness in the property market is evident in sales, with the nationwide auction clearance rate remaining below 50 per cent for the third successive week, in data collated by Cotality.

Clearance rates in both Sydney and Melbourne rose last week to sit above 50 per cent, but the rates were softer elsewhere.

HSBC Australia chief economist Paul Bloxham said house prices nationally were likely to fall through the second half of this year, and by 2 to 6 per cent in 2027.

He said the fall would probably be broad-based, with some particularly hot markets to lose steam. House prices in Perth have risen 24 per cent over the past year (and are up 126 per cent over the past six years), with investors, including those based in other parts of the country, a major factor in the surge.

Bloxham, a former Reserve Bank economist, said the fall in prices would probably weigh on household spending and inflation.

“At some level, the cooling housing market will be helpful for the RBA if it slows down consumer spending, as this will also help to take some more pressure off inflation, which is too high,” he said.