No nation is more obsessed with home ownership than Australia, but according to the Reserve Bank that might not be such a great thing.
In particular, the mad dash to get on the property ladder as young as possible may end up costing you more rather than less.
The comments came in the same paper that recommended a review of negative gearing. It was the latter, and not the comments on home ownership, that got all the press.
But the central bank’s remarks on home ownership are potentially of far deeper and longer-lasting significance to Australians than negative gearing.
What the RBA said
The RBA raised the issue in the second paragraph of its 28-page submission.
“It should not be presumed that the appropriate home ownership rate is 100 per cent, or that countries with higher rates than Australia have necessarily achieved ‘better’ outcomes. The important outcome to aim for is that all Australians can access housing that is appropriate to their needs.”
The Bank said that this outcome “need not translate into an objective that all households should purchase their home early in life, let alone that they should all be able to purchase their first home in their ideal location”.
In other words, first homebuyers should stop whingeing.
In making this point, the RBA was challenging the assumption that young first-time buyers are a privileged class of person with a moral right to own a house.
This assumption carries a lot of weight in Australia, and is one reason why many want to see an end to negative gearing – the perception is that rich baby boomers are investing in property at a tremendous rate, thus lifting house prices and squeezing virtuous young homebuyers out of the market.
The RBA argued that, while negative gearing is a contributing factor to high house prices, it is just one of many.
Why fewer young people are buying houses
Home ownership among younger Australians has fallen dramatically over the past 35 years.
In 1980, 60 per cent of 25 to 34 year olds owned their own home. By 2010, that had fallen closer to 45 per cent.
It’s a similar story for 35 to 44 year olds: home ownership fell from 75 per cent in 1980 to around 60 per cent in 2010.
Overall, though, the rate of home ownership in Australia has stayed steady since the 1960s at around 70 per cent.
One reason for this drop in young homeowners, said the RBA, is that people are getting married later. Single people are much less likely to own their own home.
Another reason may be the increased participation of women in the workforce. This fact significantly boosts the wealth of couples, because both are working. This, in turn, boosts their purchasing power. If a couple are bidding against a single person for the same house, the chances are the couple can afford to pay a lot more.
Single people find it harder to buy a house than couples; more young people are single; therefore more young people find it difficult to afford a house.
This brings us to the economic reasons. House prices, the RBA said, have indeed risen, and this is probably putting younger people off buying. But the reasons for the increase in house prices are complex, and certainly not all the fault of baby boomers and Chinese investors.
One reason is the greater availability of credit. Before financial deregulation, the RBA said maximum loan-to-value ratios (LVR) stood at 80 per cent. Now, they stand at 95 per cent. This means people can afford to pay more for a property. This is compounded by low interest rates.
Another reason is simply supply limitations. The RBA cited both geographical limitations – such as the harbour on one side and the Blue Mountains on the other of Sydney – and complex and convoluted planning laws.
What can be done about housing affordability?
The RBA’s answer was: not a lot. While getting rid of negative gearing might help, it won’t be by much. It also doubted that building more homes would have a significant effect.
In fact, the only thing that is sure to bring house prices down is a recession.
The overwhelming conclusion, though, was more thought-provoking.
“It must be recognised that there are … costs of owner-occupation, meaning that for some households, home ownership is not in their best interests, at least at some points in their lives.”
The RBA’s cool-headed analysis highlights the hot-headedness of this nation’s approach to housing. It is an authoritative challenge to our ardent belief that owning your own home is always a good idea, even when it’s not.