Winston Smith says:

"2. Government-created shortage of labour through immigration restrictions imposed to “protect” the incomes of the low-skilled."

Shortage of labour is because of immigration, since 'short cuts' to a larger population creates extra demand. Using immigration to fill the gaps is exacerbating the treadmill. Why not train people for skills in demand?

House prices are high because of greedy big boys lining their pockets. Winston Smith sounds like someone about to sell one of their investment properties?

A good article that sheds light on the major part that government policies have played in inflating house prices. It is nonsense to say that the government cannnot affect house prices as some correspondents claim. In about 1999 the Federal Government halved the capital gains tax and around the same time introduced the first home buyers grant, originally worth $14K. Together with a directive to the Reserve bank to keep interest rates low and a maintenance of negative gearing, these policies undoubtedly were a major cause of the house price bubble. There are now over 1 million property investors in Australia and a lot more money in managed funds tied up in property. House prices will not fall dramatically unless many of these investors leave the market, however most will be reluctant to get out in a falling market. The government could easily change negative gearing and/or capital gains tax policy and burst the housing bubble but it would be electoral suicide and would probably have negative economic consequences given the numbers of people affected.

Intergenerational inequity in home ownership will probably be locked in for years. The Federal Government has a lot to reflect about in its past and future policy settings.

In Addition to the Economist an out fit called Demographia (google it's easy to find) have listed 5 Australian cities in the top twenty - maybe the economist used this as the source I have know idea -

however for those quibbling, the cost of the average home is now around 7.5-8 times the average annual salary(look it up); it was half that in nineteen eighty. That is the affordability issue not so much the raw dollar cost.

So, as I have noted elsewhere add that to the HECS burden most young Australians are entering the market with the problem becomes just that little bit worse. But as long as the All Ords is on the up no one seems to bothered.

There are several factors ignored in the article that should be considered by people concerned about house prices:

1. All governemnts have a huge vested interest in the housing market as a source of tax and employment. When it comes to tax there is no way houses can hide.

2. The policy of taxing savings on nominal interest rates rather that real interest rates means that the real after-tax return is negative, so no-one saves. As a result, we have an enormous foreign debt. If taxation on savings and loans was levied on real returns the housing and savings position would be transformed, but at the cost of annoying powerful interest groups. With the bi-partisan policy of perpetual inflation this is unlikely to change.

3. Some retirees don't realise the enormous taxation they have to pay on investment property, which really makes it marginally economic. Stamp duty, land tax, vendor tax, capital gains tax, remind you of Lenin's precept that the capitalist would be crushed between the twin wheels of inflation and taxation.

The only thing that will change things is some overseas event such as war in the Middle East, or withdrawal of foreign capital from Australia.

Plersdus is right in that property is a bad investment for retirees. Rental returns are in most cases below 1% per annum. The only things that have made property investment worthwhile in the past are negative gearing (where the investor is recouping part of a loss on the investment) and capital gains, which at the moment are not accumulating in most cases. You have to be paying income tax in the highest bracket for negative gearing to be much help, a fact lost on many investors who listened to bad advice from financial advisors with a vested interest. For those approaching retirement, it would seem to be a poor investment to hang onto property in the distant hope that prices will rise again soon.

Damian, why did you address every option other than the solution? The solution is to simply allow more land to be developed for housing and allow existing land to have higher density housing built on it.

Instead of addressing the problem of supply, as you should have. You ignored it and jumped right on demand.

Given all this, it seems clear to me that this article is no more than an attempt to justify xenophobia using economic terms.