Simone de Beauvoir wrote: “The ideal of happiness has always taken material form in the house, whether cottage or castle. It stands for permanence and separation from the world.” If she is right, many people’s happiness is falling rapidly.

According to the March 2007 Quarter HIA/Commonwealth Bank Housing Affordability Index, housing affordability dropped by 0.6% in the March quarter. Mortgage repayments now account for 30.7% of an average first-home buyer’s income, up 0.2 percentage points on the December 2006 quarter.

As this graph shows, there was a nationwide dip in house prices that began around the beginning of 2004, but in average terms the housing “bust” was mild and is well and truly over. Some cities — notably Sydney — were more severely affected than others, but now it seems average prices are again (still in the case of Perth) gaining strength right across Australia.

Research carried out by Macquarie Bank’s resident guru Rory Robertson found, not surprisingly, that the old real estate maxim “Location, Location, Location” is all-important when it comes to house prices.

This implies, to a large extent, that housing in coastal and central suburbs, where demand is highest, the housing market is effectively recession-proof. Although Sydney has experienced a housing downturn, where the average house price fell for almost two years, the actual falling house prices were concentrated in the poorer suburbs, while Bondi, Bronte and Mosman prices, for example, most prices kept moving skyward.

The housing market therefore acts to increase inequality of wealth. Those people who can never get into the housing market lose wealth compared to most home owners. Among poorer Australians, some got into housing at the peak of the last boom and of this group some will have lost the value of their deposit if unable to pay the interest on their loans. In contrast, those at the big end of town are almost completely insulated, and if we are right their large property investments will have kept rising, in many cases at a stellar rate.

Henry has long argued that excessively easy money created this unholy and un-Australian situation, but savage deflation is not a sensible solution. The article outlines policies (apart from savage deflation) that have been proposed. Please contact Henry with your ideas on how this situation can be helped.

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