Crowded cities, immigration and tax breaks for property investors are being blamed for Australia having some of the most expensive housing in the world.

Australia is often imagined as the land of wide, open spaces and kangaroos.

But the everyday reality for the majority is very different, with 59 per cent of Australians living in cities with one million or more people.

Only Hong Kong, Singapore and Japan have a higher proportion of metropolis dwellers.

This is one of five key reasons Australians pay more for housing, a report by Bank of America Merrill Lynch economist Saul Eslake has found.

“Urban geography research suggests that there is typically a price premium on residential real estate in cities with populations in excess of one million,” the report said.

Australia also has some of the world’s most spread out cities, creating road and public transport delays.

People are therefore spending a higher proportion of their incomes on housing “so as to spend a smaller proportion of their time commuting”.

The observation comes a day after Reserve Bank official Luci Ellis said it was counterproductive to build houses on urban fringes when more people wanted to live near the city centre.

Mr Eslake said negative gearing, where investors paying off a mortgage can claim losses on tax, also played a role in pushing up housing prices.

The tax break meant that Australians were much more likely to own investment properties than people living anywhere else in the world.

However the report noted that while foreigners buying Australian property represented “icing on the cake” for some parts of the local housing market, they did not play a major role in pushing prices higher.

Mr Eslake said government figures suggested that the level of purchases by foreign investors represented a small fraction of the $85 billion borrowed by Australian residents to buy established homes in 2013/14.

He also noted that new housing supply was also failing to keep pace with Australia’s relatively large immigration intake.

Local and state government planning restrictions were blamed in the report for exacerbating the residential shortage.

Australia’s increasing affluence over the past two decades was also seen as having a role in fuelling prices.

Houses and apartments are larger than in most other countries while the rich were more likely to live in an expensive home.

But the report concluded that Australian real estate prices may not keep rising, if income growth slows.

By Stephen Johnson
  • Mr Eslake makes some key points that contribute to high house prices in Australia – high immigration rates, ridiculously difficult & restrictive council planning rules making it hard for new supply, larger homes & apartment sizes than global norms and high average incomes. Where he gets is wrong is he says negative gearing contributes to higher prices. Negative gearing only applies to a proportion of the 30% of homes that are rented. And negative gearing is not new – it has been around for over 30 years. This is just populist writing.

  • The trouble with density development is that it is hostage to a delivery model and interest groups who completely overwhelm politicians and policy makers. Very few policy makers or the consultants who work for developers really know much about the cost of development and how retail prices are made up. The development interest lobby argues that more and more height is needed to off-set the cost of land. The reality is that after about 15 levels the cost of construction and holding costs eat up the remaining contribution to the land value. No developer tells a policy maker that their retail prices include 25 – 30% margin. This covers risk and profit. Over seas buyers do influence retail prices. They price set. An alternative model is needed.