The can we kicked down the road has hit the curb

THIS was a once-in-a-generation Budget, not because it offered a painless fix, but because it finally admitted what Australia had spent more than 20 years avoiding.

The economy had become too dependent on rising property values, cheap debt and population growth.

That model built wealth for those already in the housing market and left too many others locked out.

THE GREAT DIVERGANCE

For more than 20 years, Australia treated housing as the safest and most protected path to private wealth.

We encouraged households to borrow more, rewarded investors for carrying debt, restricted new supply through slow planning and weak infrastructure delivery, then called it prosperity when the same homes kept rising in value.

The result was “Two Australias.” Existing owners experienced rising prices as wealth. Their equity expanded and banks lent more against it.

Aspiring buyers experienced the same prices as exclusion. The deposit moved further away, the mortgage became larger and rent consumed more income.

The Budget papers put the history in blunt terms.

Since the Howard Government introduced the 50 per cent capital gains tax discount in 1999, house prices have risen by more than 400 per cent, almost twice as fast as average full-time earnings.

Over the same broad period, homeownership among 25- to 34-year-olds fell by 7 percentage points from 2001 to 2021.

That is not a small affordability problem. It is a generational rupture.

THE PRODUCTIVITY GAP

The turning point was around 2000, when the 50 per cent capital gains tax discount replaced the old inflation-based model.

Combined with negative gearing, falling interest rates, easier credit and limited housing supply, it made leveraged property investment even more attractive.

More money chased the same limited stock of well-located housing. Land became more expensive, but the economy did not become more productive.

That distinction matters. Rising land values create private wealth for owners, but they do not automatically create national prosperity.

They do not make workers more efficient, lift business investment or build enough homes.

Too much capital flowed into bidding up existing assets, while too little flowed into better businesses, infrastructure, skills and productive capacity.

THE ILLUSION OF GROWTH

For years, headline GDP concealed the weakness. The economy kept growing because the population kept growing.

More people meant more consumption, more jobs, more construction, more government revenue and more activity. GDP per person told a more honest story.

Australia’s experience in 2024 was particularly stark. The country avoided a technical recession because total GDP kept edging higher, but the average Australian went backwards.

In the March quarter of 2024, GDP per capita fell for the 5th consecutive quarter, which is a deep per capita recession.

The scoreboard said the economy was still growing, as the public sector was helping hold up the numbers, while each person’s share was shrinking.

That is why so many Australians felt poorer even when politicians said the economy was growing.

The national accounts looked respectable, but household budgets told another story.

Families carried high mortgage debt, absorbed higher repayments and watched wage gains disappear into housing, tax and basic living costs.

STRUCTURAL REFORM

This is where the Budget clawback should be understood. It is not simply a tax grab. It is a delayed correction to a system that became too generous to asset owners and too harsh on wage earners.

From 1 July 2027, negative gearing for residential property will be limited to new builds. Existing arrangements will remain unchanged for properties held before Budget night.

Investors who buy established housing after that point will still be able to deduct losses against residential property income, but not against other income such as wages.

The Government will also replace the 50 per cent capital gains tax discount with inflation-adjusted indexation and introduce a minimum 30 per cent tax on gains from 1 July 2027.

A NEW MODEL

The logic is clear. Buying an established dwelling from another owner does not add to housing supply. Building or buying a new dwelling does.

The Government says the reforms will support around 75,000 more Australians into home ownership over the next decade and help redirect capital towards new supply.

It is unlikely the reform will make housing cheap or undo 25 years of inflated land values. It will not solve the rental shortage by itself.

But it does mark a serious admission that the old model failed. Australia cannot keep pretending rising house prices are the same as rising prosperity.

True prosperity means workers produce more, earn more, save more and buy a home without life bending debt. I

It means young people can build a future through work, not only through inheritance.

It means national growth comes from productivity and real income growth, not just population growth and bigger mortgages.

The issues that were postponed around the year 2000 have now opened a battered can of worms, presenting complex challenges for Australia.

The current decision is whether to continue delaying action or to establish an economy founded on productivity, sustainable real income growth, and sufficient housing for its residents.

NOTE: DAVID SIMON is the principal advisor of Integral Private Wealth.