SOMETHING is rotten in the state of Australias housing market.

The land of the fair go has given rise to some of the most unaffordable homes in the world.

The proportion of Aussies who own their own homes is falling, creating a chasm of wealth between the housing “haves” and the housing “have nots”.

But even for those lucky enough to afford to buy their homes, home ownership is no longer the guaranteed path to riches that it once was. At least, not for everyone.

Where you buy is important too.

Indeed, a new dividing range has sprung up across our cities, between the affluent inner suburbs and the outer suburbs. Inner city areas have enjoyed the steepest home price rises over the past few decades, with slower growth in the outer suburbs.

For a while, this was a good thing. Low and moderate income families who owned property in rundown inner city areas enjoyed rising wealth to help them in retirement. But the process of gentrification and rising prices has locked a new generation of younger people out of inner city housing.

This, in turn, is locking them out of enjoying the supersized home price gains of the more desirable inner city areas.

“Housing markets, which were once relatively egalitarian cross Australian cities, have become polarised,” according to a recent paper by the Australian Housing and Urban Research Institute.

“The homes affordable to present (and future) lower moderate income home buyers are now confined to the outer suburbs and will only increase in value at slower rates compared to housing in the more expensive inner and middle suburbs — effectively trapping poorer households on the edges of our cities.”

Time was that if you worked hard, saved hard and got a mortgage, you were rewarded with house price gains and comfort in retirement. Today, there is an increasing wealth chasm between young Australians. On the one hand, homebuyers from lower incomes families are forced to buy on the outer fringe of cities. If history is anything to go by, they will not see their house price rise as fast as in inner city areas.

On the other hand, young Australians whose parents can afford to help them buy into more expensive housing in inner areas. They are likely to enjoy outsized investment returns and, if the behaviour of their parents is anything to go by, will likely form themselves into NIMBY groups to resist new housing development in their area, keeping prices high and keeping lower income people out.

It’s not fair.

But is there anything we can do about it?

Of course there is.

One answer, according to economists, is to scrap stamp duty — which adds substantially to the cost of home purchase — and replace it with a broadbased land tax.

A land tax that applied to all properties (residential and investment) based on the size and value of the land would have several advantages.

First, it would be progressive, collecting more money from those with higher wealth and less from those without it.

Second, by abolishing stamp duty on home purchase, it would lower the hurdle for first time home ownership.

Third, house prices in more valuable inner areas would likely fall as a result, reflecting the future cost of the land tax, making housing more affordable in those areas.

Fourth, developers would have more of an incentive to actually develop inner city land into housing, increasing housing supply.

Fifth, a land tax would form a more stable revenue base for state governments. This increased revenue could be used to fund more health, education and public transport facilities to outer suburban areas. This would also reduce housing inequality by making those areas more attractive to buyers.

Transitional arrangements could apply so that the new land tax did not apply to existing homeowners who had already paid stamp duty on their home. But new buyers could pay the land tax, rather than stamp duty.

Think it’d never happen? Think again.

The ACT government is doing just that, progressively introducing a land tax on all properties and abolishing stamp duty over 20 years from 2012.

You see, some good ideas do come out of Canberra.

jessica.irvine@news.com.au