Before the explosion in negative gearing, one in every six new investors built a home. It's now one in 16. Credit:Penny Stephens As it put it in its Financial Stability Review released on Friday: "Investors are more likely to contribute to the run-up in prices than owner-occupiers because the rationales for their purchases differ: capital gains are likely a greater motivating factor for investors, and rising prices can induce even more investor demand by increasing expectations for future price rises. Investors also tend to face fewer barriers to exit." Investors were also denying owner-occupiers houses they once would have bought. Before the cut in capital gains tax that sparked the boom in borrowing for investment, fewer than half the households headed by Australians aged 25 to 34 rented. Now it's 60 per cent. The Bank and the Prudential Regulation Authority have been heavying the retail banks to make things more difficult for investors. Last week they hailed "tentative" signs of success. And then Westpac put up all variable mortgage rates 0.20 per cent. At Saturday's auctions in Sydney only 65.1 per cent of properties sold. A week before it had been 70 per cent. Back in May it was 90 per cent. Melbourne's clearance rates held up at 73 per cent.

Macquarie Group is predicting a 7.5 per cent decline in house prices over the next two years. If it's gentle, it'll be good. But why did they ever get so punishingly high in the first place? Tax is an awfully big part of it. When the Howard government halved the headline rate of capital gains tax at the end of the 1990s the price of a typical house jumped from two to three times household disposable income to four times disposable income. At no other time in Australian history have prices jumped so far so quickly. Negative gearing (making losses on rent to offset against other income in order to enjoy a barely-taxed capital gain) became mainstream. "It is a truism that if an investor is buying a property, an owner-occupier is not," the head of the Bank's financial stability department Lucci Ellis told the parliament's home ownership inquiry in July. "To the extent that person is not then buying their own home, they are therefore creating a market for rental and making it attractive to purchase investor properties." Investors like to believe that they are creating new properties, adding to supply and driving down prices. But few of them are. Before the explosion in negative gearing, one in every six new investors built a home. It's now one in 16. Investors like to believe that they are creating new properties, adding to supply and driving down prices. But few of them are.

Tilt has also ramped up house prices by making them more affordable to start with, at the cost of being less affordable over time. That's the "tilt". It used to be the other way around. When interest rates and inflation were high, the upfront cost of buying was high (because the of the mortgage rate) but the payments became easier over time as wage rises inflated the burden away. These days low interest rates make it much easier to buy a house (so long as you can get a deposit) but low inflation makes it much harder to pay off. The changed tilt has pushed up prices because borrowers who didn't realise what happened rushed in and bid in order to take advantage of cheap rates without realising that the burden would stay with them for much longer. Increasing wealth has been the other big driver of house prices. The richer we get after meeting our basic needs the more we are prepared to pay for the place in which we live. (The fact that owner-occupied housing is entirely tax free helps as well.) The typical home now has 3.1 bedrooms, up from 2.9 two decades ago, as well as other rooms such as studies and extra living rooms that used to be uncommon. Eight out of 10 homes now have at least one bedroom free. But that's not where the real money is going. For those who can afford it, place is more important than space. And there's a limited number of well-located places. The bigger our cities become the more important it becomes to have a place close in to the centre, or near the sea.

It's the prices in these suburbs that move first, and short of a wealth tax or a land tax or a capital gains tax on the family home, there's nothing that that can be done to stop them rising. "More supply", the simple fix, isn't going to help. It's wise to resign ourselves to the reality that some house prices are always going to be beyond most of us. But if the prices of other houses ease off and fall for a bit, we will be able to count ourselves lucky.