For more than two decades, Australian house prices and Australian wages have been moving in very different directions.
House prices have risen substantially relative to household incomes, making it increasingly difficult for many Australians to buy a home without taking on much larger mortgages.
So how did we get here?
One important part of the story is something most Australians probably never think about: how we measure inflation.
The Part of Housing We Don't See in the CPI
In 1998, Australia changed the way housing costs were treated in the Consumer Price Index (CPI).
Before then, mortgage interest payments were included in the CPI. From 1998, they were replaced by the cost of building new dwellings — a measure that excludes the value of the land itself.
Land is where much of the growth in Australian property prices has actually occurred.
Separately, the purchase price of an existing home is not included in the CPI, and never has been. The Australian Bureau of Statistics treats established homes as existing assets being transferred between households rather than as consumption.
That distinction matters.
The CPI is one of the main measures we use to understand inflation in the economy. It influences how we think about the changing cost of living and plays an important role in economic policy.
But the price of an established house, arguably the biggest purchase most Australians will ever make, isn't directly captured by the CPI.
This doesn't mean house prices have nothing to do with inflation or the economy.
It means that house prices can rise substantially without those price increases appearing directly in the CPI.
And over time, that can contribute to a growing gap between the cost of buying a home and the income Australians earn.
How Did Australians Keep Paying More?
If house prices rise faster than wages, something has to bridge the gap.
For a long time, borrowing did exactly that.
Lower interest rates increased the amount households could borrow. Longer loan terms reduced the size of individual repayments. The growth of two-income households increased borrowing capacity. And greater access to credit allowed Australians to bid more for property.
In simple terms:
When incomes couldn't keep up with house prices, borrowing capacity helped fill the gap.
This helped support higher property prices, but it also meant households took on larger amounts of debt to purchase those properties.
Australia's housing market has therefore become closely connected to household borrowing.
But Borrowing Has a Limit
There is a basic economic constraint that eventually matters:
A house is ultimately paid for by someone's income.
A household can borrow more today because interest rates are lower, the loan is spread over a longer period, or two people are earning instead of one.
But none of those things permanently changes the underlying income of the household.
Eventually, the amount a household can borrow is constrained by what it can afford to repay.
That leaves Australia with a fundamental problem.
If house prices continue rising faster than household incomes, either incomes need to catch up, or the relationship between house prices and incomes needs to change.
That adjustment does not necessarily mean a dramatic collapse in house prices.
It could also happen gradually through a combination of slower house-price growth and stronger income growth.
The important point is that the gap cannot simply expand forever.
Why a Housing Crash Isn't the Answer
It might seem obvious that falling house prices would solve Australia's affordability problem.
If houses became cheaper, wouldn't more Australians be able to afford them?
In isolation, yes.
But housing isn't an isolated part of the Australian economy.
For Australian households, property represents a very large share of wealth. It is also closely connected to mortgages, bank lending, investment decisions and household finances.
That means a large and sudden fall in house prices could have consequences well beyond people trying to buy their first home.
It could affect existing homeowners, highly leveraged households, investors, banks and the broader economy.
So there is a second question we need to ask:
If we don't want to solve housing affordability through a major collapse in property values, how do we close the gap between house prices and incomes?
The Better Long-Term Adjustment: Grow Incomes
The answer starts with productivity.
Productivity is simply how much value we produce for every hour of work.
If a worker, business or economy can produce more with the same amount of labour and resources, the economy becomes more productive.
And that matters for wages.
Over the long run, productivity growth is an important driver of real wage growth. Higher productivity allows wages to rise without simply pushing up the costs faced by businesses.
This is the crucial distinction between nominal wages and real wages.
A worker can receive a 5 per cent pay rise and still be no better off if prices rise by 5 per cent. Real wage growth is what actually increases purchasing power.
For Australians to become genuinely more prosperous, we need to produce more value, not simply increase the number printed on a payslip.
And This Is Where Energy Matters
This brings us to one of Australia's most important economic inputs: energy.
Industries such as manufacturing, mining, processing, agriculture, transport and technology all rely on energy to produce goods and services.
If energy is expensive or unreliable, it can increase the cost of producing things in Australia.
That can make Australian businesses less competitive and discourage investment.
For Australia to achieve sustained productivity growth, businesses need an environment in which they can invest, expand, innovate and compete.
Reliable and affordable energy is one part of that equation.
We Can't Simply Legislate Our Way to Prosperity
There is an important distinction here.
We can increase nominal wages through policy decisions.
But we cannot create lasting real prosperity simply by increasing the number on a payslip.
If businesses are producing no more than before, but their labour costs rise significantly, those higher costs can eventually show up elsewhere, including in the prices consumers pay.
That is why productivity matters.
Higher productivity allows businesses to pay higher real wages because workers are producing more value.
The Housing Problem Is Ultimately an Income Problem
For decades, Australia has increasingly relied on credit and borrowing capacity to support a housing market where prices have moved further ahead of incomes.
That model has limits.
We should not assume that the only way to make housing more affordable is to make existing homeowners poorer by forcing property prices down.
Nor can we expect household borrowing to increase indefinitely.
There is another path.
Make the economy more productive.
If Australia can increase productivity, businesses can create more value. More productive businesses can support higher real wages. And higher real wages can gradually improve the ability of households to afford housing.
That doesn't mean Australia's housing affordability problem disappears overnight.
It means the adjustment can happen through a stronger economy and rising incomes rather than relying entirely on falling asset prices.
The Adjustment Australia Should Be Pursuing
The fundamental problem is not simply that Australian houses are expensive.
It is that house prices, household incomes, borrowing and the productive capacity of the economy have become increasingly disconnected.
We cannot solve that problem forever by borrowing more.
And we cannot create lasting prosperity simply by increasing nominal wages.
The long-term answer is to increase the amount of value Australians can produce.
That means improving productivity, encouraging investment, supporting competitive industries and ensuring businesses have access to the inputs they need, including reliable, affordable energy.
The goal should not be to make Australians poorer so that houses become cheaper.
The goal should be to make Australians more productive so that their incomes can catch up.
Higher productivity. Higher real wages. A stronger economy.
That is the economic adjustment Australia should be pursuing.
