PHOTO: There are lessons to be learnt from Perth’s property market, according to independent economist Stephen Koukoulas. (Source: Getty)

House prices – is there a topic that raises the passion of Australians more than this?

A common theme from many looking at house prices is that affordability in Australia is poor because of a combination of tax rules on negative gearing and capital gains tax in particular, but also given the structural lowering of interest rates over the past three decades.

The stories of investors outbidding first home buyers are legendary. There was even a recent example of an 8 year old boy bidding successfully for a house in Sydney on behalf of his father who was an investor.

The outrage was palpable! It was presented as the classic illustration of a first home buyer being squeezed out, yet again, from an investor.

But when we dissect house price changes and trends, it is obvious that tax rules and interest rates over the few decades have little lasting impact on house prices. It is other economic and demographic issues that are more fundamental in determining house price changes.

To show this, I will examine house price changes in Perth.

Perth – a fabulous city

Perth is a city of over 2 million people. Its population has been growing for many decades and its economy is linked to the fortunes of the mining sector.

When it comes to drivers of house prices, residents of Perth have the same negative gearing and capital gains tax rules as the good folk of Sydney and Melbourne and the rest of Australia.

Perth-based mortgage holders also pay the same interest rates as all other Australians which is the joy of the RBA setting monetary policy for all of Australia and not just individual States, Territories or industries.

On these important issues for housing, there is no difference between buyers in Perth and Sydney, Hobart or Bendigo, Canberra or Rockhampton when it comes to influences and decisions to buy and sell residential property.

If these issues were the key long-term drivers of house prices, you might think that Perth prices would be trending in much the same way as other capital cities in Australia, particularly over the course of long run, which can be classified as 10 plus years.