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The Prime Minister's hint that the First Home Owners Grant might be axed has further intensified interest in a housing market which was already at fever pitch.

The owner occupied home comprises over half of the average Australian family's wealth.  Unsurprisingly, house prices command far more attention than those of shares, which account for 6 per cent of wealth or even super (comprising 15 per cent of wealth).  Moreover, a vast industry of builders, suppliers, land developers, and real estate agents is also dependent on housing.

At the present time, there is an almost unprecedented polarisation of views about the future of housing prices in Australia.

NSW academic Steven Keen has been labelled a doom merchant for forecasting a 40 per cent decline in house prices.  Unfortunately the persuasiveness of his contemporary forecasts is somewhat compromised since he has been crying wolf on housing for longer than anyone can remember.

In the other corner, Rismark's Christopher Joye adopts the Pollyanna approach, arguing that prices won't fall, though latterly hedging his bets by adding, "As long as households have access to credit on reasonable terms".  He draws comfort from observing rising house prices in the 1991 recession.  This though is disingenuous, because prices had already fallen in the previous three years (by 40 per cent in Sydney and 30 per cent in Melbourne).

House prices were down 6 per cent in the December 2008 quarter with Australian Property Managers data inferring a further fall in the March 2009 quarter.  This is in spite of support by the First Home Owner Grant.

The debate on where house prices are going -- and for the record I see them declining by at least 20 per cent -- is only one dimension.  The real issue for house prices and affordability is land supply.  Based on the costs of developing land in readiness for house construction, no suburban block anywhere on the urban fringe in Australia should sell for greater than $70,000.

That $70,000 is the cost of developing the land -- levelling, building roads, water and sewers, telecom lines, installing drainage and so on -- combined with the initial value of the land itself.

The underlying value of undeveloped land is reflected in the prices of farmland, which comprises the overwhelming preponderance of land use.  Based on a maximum of $10,000 per hectare that agricultural land sells for, the underlying value of a housing block is only around $1000.

But the restrictions placed on development by State Governments creates a scarcity value that raises this value at least 50 fold.  There is no physical scarcity causing this price rise.  The area on the periphery of all our cities is massively adequate to accommodate any conceivable housing needs.  Even Sydney has the Plain of Cumberland where a million extra houses could be built on land that is presently used for sub-marginal agricultural activities.

It follows that the price for developed land for a standard 500 square metre block should be about $70,000.  Actual land prices range from $130,000 (Melbourne) to $230,000 (Sydney), which means a regulatory induced price premium of $60,000 to $160,000 for an average new house.  This is far greater than the selective subsidy through the first home owner grant and in terms of mortgage repayments adds almost $300 per month to the costs of a new buyer in Melbourne and a staggering $900 per month in Sydney.  Added to this are the effects of discriminatory taxes levied to a greater or lesser extent on new developments in all states.

The price premium from regulatory induced land use restraints and higher taxes on new houses has a knock-on effect throughout the housing stock.

Some state governments, notably Victoria are seeing the possibilities of injecting greater activity into housing by loosening up the regulatory stranglehold.  In this respect, Victoria also sees the attraction of allowing more land to be used for urban development as a means of supplementing state revenues.

Unfortunately, Minister Plibersek's hand picked National Housing Supply Council is complacent about land supply.  Failing to understand the pressures that are operate on price, it blandly states that supply is adequate for the next two years house building requirements.

Such a statement is what the Commonwealth has wanted to hear, and thereby avoid criticising its kindred state governments.

In fact, the noose around the housing land market has artificially boosted prices and reduced demand.  Recession will bring more price reductions, and UK and the US West Coast, where land use regulations also constrain supply have already seen 20-40 per cent falls.

Now, as recession intensifies, is the ideal time to release the regulatory shackles on land supply to allow new home costs to fall.  Canberra should insist on the state governments taking such action at the same time as it removes the selective subsidy to first home owners, thereby setting the stage for a house building revival based on genuine supply and demand.

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