Judith Yates' submission to the Standing Committee on Economics Inquiry into Home Ownership
GUEST OBSERVATION
The Submission to the Standing Committee on Economics Inquiry into Home Ownership by Judith Yates Honorary Associate Professor in Economics, University of Sydney, has documented the current rates of, and widespread declines in, home ownership by age and by household income.
It explains the long-term decline in home ownership amongst younger households in terms of underlying structural trends in the Australian economy, arising from arise from social and demographic factors and from economic and institutional factors.
In relation to the latter, it highlights the impact of demand from established households both as owner-occupiers and as investors in light of growing income inequality.
It points, in particular, to the role of the system of housing finance that makes it relatively easier for better-off households to accumulate housing assets through debt finance; the income taxation system that provides them with an incentive to treat property as a means of accumulating wealth ahead of its more essential role as providing shelter; and the system of property rights in Australia that ensures that those who do own land are able to act as rent-seekers by expropriate for their own the increase in land values not of their own making.
It suggests that increasing land values in urban locations are an inevitable outcome of the combined impact of the pressure of income and population growth; structural change which results in increasing urbanization and concentration of (knowledgebased) employment in its central locations a failure to invest in a rapid-transit transport infrastructure that facilitates cost-effective access to employment and essential services.
It concludes that that attention needs to be paid to the underlying structural factors that have contributed to declining home ownership if trends over the past 50 years or so are to be reversed. Land-release and urban planning policies might ameliorate supply shortages when pressures on dwelling prices arise from increasing demand driven by population (or, more specifically, household) growth.
They are less likely to be effective when pressures on dwelling prices arise from increasing demand for bigger and better located dwellings driven by economic growth and/or increasing inequality. In this instance, policies are needed to reduce demand from existing households.
Although Australia’s home ownership rate has remained relatively stable at around 70% for half a century, much of this stability has arisen because of demographic change with an increase in the proportion of older households with a high incidence of home ownership offsetting a decline in the incidence of home ownership among households who have a reference person less than 45 years old.
That this decline was already being observed in the late 1980s and has continued at a relatively steady rate since then suggests structural rather than cyclical drivers are critical.
This submission focuses on these trends and on the factors that explain declining rates amongst younger households.
Home ownership in Australia expanded rapidly in the 1950s from a post-war level of 47% to reach its current level of around 70% by 1961, with much of its post war growth to economic and demographic drivers of the time.3 Home ownership was promoted as a means of solving housing shortages and substandard rental accommodation prior to the Second World War and has been underpinned by both explicit and implicit government policies in the post war period.
These have included direct subsidies (such as grants to first time home purchasers and subsidized mortgage interest rates) and indirect subsidies (such as exemptions from federal income taxes and state land taxes and concessions on stamp duties). A long standing ideological commitment to home ownership added to these drivers.
Aggregate home ownership in Australia has been relatively stable for the past 50 years since reaching its current level of around 70 per cent in the 1960s.
Home ownership rates for those in the 25-34 year old group peaked in the mid-1970s and have declined more or less steadily since then, falling by 9 percentage points from 60 per cent to 51 per cent between 1976 and 2001 and by a further 4 percentage points to 47 per cent to 2011 – in other words, by 13 percentage points in 35 years.
The decline for those in the 35-44 year old group followed in the mid-1980s as the earlier cohort aged, falling from 74 per cent in 1986 to 64 per cent in 2011.
Many studies have shown that age, marital status and family composition are key demographic determinants of home ownership.6 They also have shown that home ownership is significantly constrained by economic factors, such as household income (both current and permanent) and wealth and affected by economic factors (such as housing subsidies and taxation) that affect the relative cost of owning vis a vis renting.
In broad terms, these tenure choice studies show that, for the past 50 years or so, home ownership rates in Australia have been higher for older than for younger households, higher for couples than for single person households and, for each of these household types in each age group, higher for households with children than without children. On an age specific basis, home ownership rates are higher for higher income and higher wealth households. At least since the 1990s, the declines in home ownership rates for younger households have been greatest for lower income households.
Changes in these socio-demographic and economic drivers over time explain the relative stability of the aggregate home ownership rate in light of declining rates for younger households. In other words, it is the ageing of the population that has been the dominant factor that has kept Australia’s aggregate home ownership rate stable at around 70%.
More complex explanations are required to explain the declining rates for younger households.
Explaining the decline in home ownership rates amongst younger households in Australia can be broadly categorised into demand factors driven by social and demographic or institutional and economic factors and supply factors that affect the structure of Australia’s urban housing markets.
Socio-demographic factors appear to be the primary drivers of decline from the mid-1970s through to the 1980s with economic and market structure factors and being the primary reasons for this decline being sustained through the 1990s and 2000s.
Key socio-economic drivers that affected the home ownership rates of younger households from the 1970s arise through changes in household composition of these households and to a growth in single person and single parent households.
These include: An increase in the proportion of two income households
A decline in marriage rates and an increase in divorce and separation
A decline in fertility rates
An increasing share of migrants in population growth
The combined effect of these changes contributed to a relative increase in the proportion of single person and childless couple households amongst those in the 25-44 year age group with lower home ownership propensities than other household types.
These social changes had two significant but offsetting economic impacts. An increase in the number of two earner households resulted in a move away from the traditional model of a single (male) breadwinner family household and increased the number of potential first home buyers who were higher income households.
Changes in social attitudes, however, also meant many younger people deferred partnering, and many who had been partnered, divorced or separated which increased the number of single adult households, many of whom had relatively low incomes.
The combined effect of these changes contributed to changes in income distribution and to market pressures that impeded access for lower income households. Because of the social changes that were occurring, there was some disagreement over whether the decline in home ownership observed from the mid-1970s until the 1990s was simply a temporary deferral or whether it was a result of economic changes that increasingly constrained access so that the decline would more likely be permanent.
This is an edited transcript.
Judith Yates is honorary associate professor in economics, University of Sydney.