“Enjoy the tax cut”: Why Macquarie thinks Australian house prices could go nowhere for 20 years

For most Australians, property has become deeply intertwined with wealth creation and the wealth effect.

When the value of our homes - particularly our principal place of residence - rises significantly, many of us feel wealthier and more comfortable spending money, whether that’s renovating the kitchen or splurging on a cruise through Europe or Alaska.

But according to a provocative new report from Macquarie’s macro strategy team, the golden age of real house price growth may already be behind us. And property investors, you may wish to pay close attention to this.

The report, titled A Brief History of Australian House Prices, argues much of Australia’s housing boom was driven by a handful of structural forces that are now exhausted - and proposed tax changes from the recent Budget could make the next decade look very different from the last.

Macquarie’s thesis will likely be uncomfortable for property bulls: if house prices merely track inflation over the next 10 to 20 years, there may be little to no real capital growth left for investors.

The Australian housing boom wasn’t as constant as many think

One of the report’s most interesting observations is that Australia’s housing market has not actually delivered uninterrupted real growth over the past four decades. As Macquarie explains:

"Real dwelling prices in Australia have increased ~160% since 1980 (2.1% CAGR).

However, for 2/3rds of that period, prices trended sideways, with most of the gains occurring in two short bursts (2000 to 2003, and then 2012 to 2022).

Real prices were flat between 1981 and 2000, albeit with several mini cycles. 

Prices then jumped 45% between 2000 and 2003 (10.6% CAGR), following the introduction of the capital gains tax discount in 1999. 

Between 2004 and 2012 prices again moved sideways with a few mini cycles, including around the GFC. 

Prices jumped 55% between 2012 and 2022 (4.8% CAGR), in part due to low interest rates during the period of 'secular stagnation'. It looked like the rally stalled in 2018, as tighter lending standards weighed after the Banking Royal Commission. However, negative real mortgage rates during COVID drove another surge."

The implication is significant. If those two structural tailwinds - tax incentives and falling interest rates - were responsible for much of the boom, what happens when they reverse?

The structural tailwinds are fading

Macquarie argues several long-term forces that supported housing over recent decades are unlikely to repeat.

These include:

1. The multi-decade decline in interest rates
2. Financial deregulation and easier access to credit
3. Rising female labour force participation, which boosted household borrowing capacity

Housing credit exploded relative to GDP from the late 1980s through to the GFC - from around 15% to 85% - while investor participation in the market also surged after the introduction of the CGT discount.

At the same time, affordability has deteriorated dramatically.

One chart compares average dwelling prices against a measure of “capacity to pay” based on mortgage repayments as a share of household disposable income. The gap has now widened to historically extreme levels.

"The increase in dual income households boosted household incomes and capacity to pay for housing over recent decades. With female labour force participation approaching that for males, those gains are unlikely to be repeated," the report said.

Property prices do fall, especially in real terms

For those convinced property prices only move in one direction, this report may come as a rude shock.

Since 1980, national nominal house prices have experienced eight separate peak-to-trough declines. But in inflation-adjusted terms, the declines were far more severe.

"For example, it took almost 11 years for real prices in Melbourne to surpass the 1989 (historically low affordability) peak, while in Perth real prices did not get back to the 2006 level until 2024 (17 years later)," Macquarie said.

Sydney, meanwhile, has experienced nine separate downturns since 1980, including several falls exceeding 12% in nominal terms.

That matters because many Australians mentally anchor property performance to nominal prices rather than real purchasing power.

A house that rises 3% annually in a 3% inflation environment may feel like wealth creation - but in real terms, it effectively goes nowhere.

The big question for investors

The report arrives at a crucial intersection for Australian housing.

Affordability is near record lows. Interest rates remain elevated compared to the 2010s. Policymakers are increasingly focused on housing inequality. And political debate around tax concessions such as negative gearing and the CGT discount continues to intensify.

At the same time, incomes are rising, immigrants continue to join our country, and the economy is in a relatively strong position.

Macquarie’s argument is not necessarily that Australian property is about to collapse.

Rather, it’s that the next 20 years may look very different from the previous 20.

But if there is a silver lining, the report delivers it with a dose of dry humour.

"In a scenario where real house prices remain flat for an extended period, the effective capital gains tax could fall to zero under an indexation system," Macquarie said.

“The irony is of course that if real prices once again move sideways for a decade or two (an outcome needed to ‘fix’ housing affordability), incremental revenue from capital gains tax will be zero: enjoy the tax cut."