The Grattan Institute released a study, Housing affordability: re-imagining the Australian dream, recommending that more houses be built to ease home affordability.

House prices have more than doubled in real terms over the past 20 years with the strain most acute in Sydney and Melbourne.

“It’s been a perfect storm of rising incomes and falling interest rates, rapid migration, tax and welfare settings feeding demand, and planning rules restricting supply,” says the report.

Since 2012, house prices have risen 70% in Sydney and 50% in Melbourne.

Here’s how wages have lagged house price growth:

Pay rises are currently barely keeping up with inflation. The Australian Bureau of Statistics’ wage price index grew by 0.55% over the December quarter in seasonally adjusted terms, leaving the change on a year earlier at 2.08%. Consumer price inflation running at 1.9%.

However, a long period of record low interest rates have also had an impact, making it easier for buyers to get bigger loans.

Regulators have recently been restricting that supply of cheap finance for property investors by limiting the amount of interest only loans the banks can make. Prices are no longer rising in Sydney and conditions have also cooled in Melbourne.

House prices took off in the mid 1990s. Average prices have increased from around two to three times average disposable incomes in the 1980s and early-1990s to about five times more recently.

Median home prices have increased from four times median incomes in the early 1990s to more than seven times today. In Sydney, it’s more than eight times income.

The median house price at $1.1 million in Sydney is more than double the median price of $450,000 in the rest of NSW.

“This is not surprising: all around the world, house prices are generally much higher in large cities,” says the report.

In Australia over the past 20 years, prices grew fastest in areas closer to the centres of all capital cities as the population grew near where the jobs are.

“And as our cities have grown, traffic congestion has got worse and commuting times have increased, making inner-city houses even more desirable,” says the report

Most of the price of residential property in Australia reflects the value of land rather than the cost of construction or the value of buildings.

“Australia has an abundance of land, there is a limited supply of well located land, particularly close to the centre of our major cities,” says the report.

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