“Since 1986, average weekly earnings have increased by 128%, but house prices by 310%,” says Peter Saunders in the new edition of the Centre for Independent Studies magazine Policy, out today. “Many people who bought at these inflated prices are financially stretched and vulnerable. The recent house price boom has made many people better off, but has also made housing less affordable, particularly for first home buyers.”

It’s an exquisite illustration of the complexity of the tax dilemmas currently facing the Howard Government. “A number of government policies have contributed to the inflation of house prices,” Saunders says. “These include the First Home Owner Grant, negative gearing, changes to capital gains tax, and restrictions on the supply of land.” He recommends scrapping the First Home Buyers Grant, considering how to increase the supply of land, and looking at negative gearing – the attractiveness of which is largely a function of Australia’s high marginal income tax rates.

Ah. Tax. Finance Minister Nick Minchin says we’re not going to get tax cuts. But Saunders says “the house price bubble has finally burst.” Are we losers all round? What are the intergenerational implications of house prices? Can young people afford to buy in? Can they service their record levels of exposure? They have taken large loans in a low inflation climate. They cannot depend on inflation to help them reduce the size of their debt in the way it helped their parents.

“The latest housing boom has left new and recent buyers stretched and vulnerable,” Saunders concludes. “There is not a lot that government can do about this, for the key factors in the boom have been the shift to low interest rates and changing demographics… But governments have had some influence on house prices as a result of their tax, spending and regulatory activities, and there is a strong case for reviewing policies in these areas.” And what of the issue of negative gearing – the issue that sparked so many spats and somersaults in the lead up to the election last year? You’ll have to have check out the CIS paper here.