In Australia’s past, low and high income earners, young and old, owned homes. But since the early 1980s, housing in Australia has transformed. Today, home ownership largely depends on your income, and how wealthy your parents are. Housing is contributing to widening gaps in wealth between rich and poor, old and young.

House prices more than doubled in real terms over the past 20 years. The strains are most acute in our major cities. Since 2012, house prices have risen 50 per cent in Melbourne, and 70 per cent in Sydney. Lower-income households are spending more of their income on housing, and many are struggling to pay the rent.

Our cities are not delivering the best mix of housing location and density, given what people want. It’s getting harder for people to find housing close to the job that suits them best. Major cities are increasingly geographically divided, so that young people with less income and education are concentrated on the fringes.

Governments have preferred the easy choices that merely appear to address the problem. The politics of housing reform are fraught because most voters own a home or an investment property, and mistrust any change that might dent the price of their assets. At a local level, the politics of planning are poisonous: most people don’t like new developments in their neighbourhoods.

Without change, the great Australian dream risks turning into a nightmare. Grattan Institute’s new report, Housing affordability: re-imagining the Australian dream, shows what needs to be done. Governments must act to build more housing and reform policies that artificially inflate housing demand.

State governments should fix planning rules to allow more homes to be built in inner and middle-ring suburbs of our largest cities. Building an extra 50,000 homes a year for a decade could leave Australian house prices 5-to-20 per cent lower than what they would have been otherwise.

More small-scale urban infill projects should be allowed without council planning approval. State governments should also allow denser development ‘as of right’ along key transport corridors. They should swap stamp duties for general property taxes. And state land taxes on investment property should be calculated without reference to total land-holdings, to encourage more institutional investors likely to provide longer-term tenancies.

The Commonwealth Government can improve housing affordability somewhat – and immediately – by reducing demand. It should reduce the capital gains tax discount to 25 per cent; abolish negative gearing; and include owner-occupied housing in the Age Pension assets test. And unless the states are prepared to reform their planning systems, the Commonwealth should consider tapping the brakes on Australia’s migrant intake.

In the past few years there’s been some progress. Sydney in particular has started to add materially more medium and high-density housing along its major transport corridors. Today’s record level of housing construction is what is needed to meet record levels of population growth driven by rapid migration. It’s not enough to unwind the accumulated backlog of a decade of policy inaction, but at least it’s in the right direction.

If governments really want to make a difference, they need to stop offering false hope through policies, such as first home-owners’ grants, that are well-known to be ineffective. Governments have no chance of bringing the community with them when they keep telling voters the easy policies will do the job. Instead they need to explain the hard choices, to prepare the ground for the tough decisions that need to be made.

Either people accept greater density in their suburb, or their children will not be able to buy a home, and seniors will not be able to downsize in the suburb where they live. Economic growth will be constrained. And Australia will become a less equal society – both economically and socially.