Ross Garnaut says housing and tax reform are needed to improve economic prospects of young people

Australia is at risk of "giving up on equity" if governments fail to reform housing and tax policies to improve the economic prospects of younger generations, one of the country's most respected economists has warned.

It comes as experts grow increasingly concerned that the cost of living challenges could worsen generational inequality, as young Australians become more frustrated over the current economic circumstances.

Ross Garnaut, an emeritus professor of economics at the University of Melbourne who has spent his career working in public policy, said young people are rightly justified in feeling as if the economy is stacked against them.

"Especially when you compare the situation with younger Australians when I was their age," he told The Business.

"[It's] much harder to get housing compared with the days of full employment which I grew up in, [it's] harder to get a job, and especially if people don't have high qualifications.

Asked whether the housing crisis was influencing how young people approach university and their careers, Professor Garnaut said in his view, it was affecting "their attitude to life".

"It's quite clear that in this generation, kids can't go into life in the same expectation of owning their home as before," Professor Garnaut said.

But even though some young people may benefit from intergenerational wealth, like the bank of mum and dad, to buy property, he warned it will further entrench inequality.

"Not all kids have wealthy parents who are able to hand over those sorts of assets," Professor Garnaut said.

"We've given up on equity if we see that as the main mechanism [for home ownership]."

Is there a way to make the system fairer?

In Professor Garnaut's view, there are several ways to create a more equitable economy for younger generations, but it needs to start with a "return to full employment".

"We were closer to it for a while, [but] unemployment is drifting up again," he said.

"That has a disproportionate effect on young people. We need real jobs to allow people to feel secure in taking on a housing loan. That's number one."

That would then allow interest rates to be lowered, Professor Garnaut said, given full employment is consistent with low and stable inflation.

"I think they've [interest rates] gone unnecessarily high, that's reflected in the very weak labour market recently," he said.

"Some people are saying they should go higher because of inflation. Those people, economists or not, are not looking at what's actually happening in the labour market, and to inflation."

Those measures, in conjunction with making it easier for houses to be built, would be "part of the solution", he said.

Professor Garnaut's view differs slightly to that of the Productivity Commission.

Compared to historical jobs markets, Commissioner Catherine de Fontenay said the current job market has been "really good" since the end of the COVID-19 pandemic.

"The job market was actually pretty soft before COVID, and until we did a study of it, we did not fully realise how difficult the job market was for young people," she told The Business.

"It was really difficult to get a job that fully used your qualifications and put you on a path to high earnings.

"The exciting thing about the post-COVID period is that so far, the job market has been really good, and that's incredibly important for young people and for their prospects, their ability to get the kind of job that they want to be on a path and learning more skills and getting ahead.

"That's going to make a huge difference to the rest of their life. So I do think while there are serious pressures on this generation, there's also a lot to be excited about."

'Things will head in the right direction'

Even with an ambitious push to increase housing supply as part of the federal government's recent budget, Professor Garnaut said it was unlikely to single-handedly ease housing affordability pressures.

"Unfortunately, we're a long way behind, and we have been getting behind for a fair while," he said.

"There are problems in the tax system which have made it harder for people to own their own homes because they've made it easier to invest in other peoples' homes.

"We've got supply problems in a lot of our councils, that's at a state level … and high interest rates have slowed down housing investment in the past year or so.

Professor Garnaut said that when taking high immigration levels into account on top of those supply factors, it has created "very tight" conditions, although they are expected to ease.

"We just went too high after the pandemic … [but] we're getting back towards a normal level [of immigration]," he said.

"Current policy is due to reduce rates of immigration, so things will head in the right direction — the question is whether they'll head fast enough."

Professor Garnaut also disputed the idea put forward by the Coalition to stop foreign investors from purchasing existing homes as a way to address the housing crisis.

"I don't think [the opposition leader] has looked at how many foreigners are actually buying homes," he said.

"That's a very small part of the story, so it can only be a very small part of the solution."

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