Economics,  Politics

Home ownership – increasingly just a dream and something we can do about it

One of the more disturbing statistics to come out of last week’s Melbourne University HILDA (Household, Income and Labour Dynamics in Australia) Survey is the decline in home ownership. The survey has tracked the lives of some 17,000 Australians since 2001, and this finding has potentially far reaching effects that will probably only come to be fully appreciated in years to come.

The HILDA survey was released last week and showed an alarming decline in home ownership across all age groups and income levels – see chart 1 below (which appeared in The Australian). The biggest fall was among couples with dependent children, where ownership rates have fallen from 55.5% in 2002 to 38.6% in 2014. Among couples without dependent children it has gone from 46.7% in 2002 to 35.1% in 2014.

The combination of steadily increasing house prices and stagnant wages growth has left a growing number of people dependent on renting their home, so that more and more, the “Australian dream” of owning the quarter acre block, remains just that, a dream.

The decline in home ownership could have profoundly negative consequences in years to come. The University of Technology Sydney did a report that considered the consequences on retirement of not owning a home and said:

“Home ownership, along with the age pension, is probably the most important pillar of retirement income policy… A household that retires not owning a house cannot survive on the age pension. They will have insufficient funds to meet their consumption needs (defined as 75% of their pre-retirement consumption).”

So without home ownership as an asset-base-safety-net there will likely be more people reliant on government welfare, a frightening prospect when the Commonwealth Social Services budget is already growing at 8% a year while total revenue is growing at less than 3% per annum.

Making it harder for our kids

Compared to a couple of generations ago, it’s tougher for kids these days. If they undertake tertiary studies after school they’re likely to come out with a debt of anywhere between $30-60,000, which they start paying off when their income hits $42,000 per annum.

Just as they’re paying off their HECS debt it’s probably about the time they’ll be thinking about a family, which is when most of us would have also started thinking about buying a house. But to put down a 10% deposit on the median-priced house in Melbourne these days requires savings of about $86,000, and in Sydney it’s $115,000.

One thing that might help

One measure that could take some of the heat out of home prices, particularly in Melbourne and Sydney, is to stop non-resident foreigners buying residential property here.

At the moment non-residents are supposed to gain FIRB approval before buying residential property. If they do bother to do so, the government website makes it clear there will be very little restriction placed on the purchase of new properties. Earlier this year, Credit Suisse released a study of tax records showing between July 2016 and January 2017, foreign purchasers hoovered up 25% of all new residential properties in NSW and 16% in Victoria. Combined it was one in every five houses was bought by someone who doesn’t live here, with Chinese buyers accounting for 80% of those purchases and Indonesians the second biggest cohort.

How can this possibly make sense when politicians, academics and anyone trying to buy a house is talking about a ‘housing crisis’? The usual argument in favour of allowing foreign investment is that Australia needs overseas capital to fully develop its economy. Whilst that’s true for industrial, agricultural and infrastructure projects, when Melbourne house prices have risen 60% in five years it is clearly not the case for residential property, indeed, there is evidently an excess of capital going in to the sector.

Australia is an attractive market for foreign investors: a developed, sophisticated economy and rule of law. But it is a very small market. Between them just China and Indonesia have more than 1.6 billion people. Even if only the top 1% of the population are candidates to purchase residential property in Australia, that expands the market by a potential 16 million people, or two-thirds of our own population. It is simple economics that more demand pushes prices up, and the current restrictions on foreign purchases of residential property are all but farcical (I was told of one Chinese national who owns 17 houses in one of Melbourne’s more expensive ‘leafy’ eastern suburbs!).

This has nothing to do with prejudice in any way. I couldn’t care less what someone’s race or religion is, it is purely a question of whether a foreigner, who has no intention of living in the country let alone the house, should be allowed to purchase residential property in Australia at a time when home ownership is out of reach for too many of our own residents. Also, I am already a property owner, so I am not motivated by self-interest, though I am the parent of two teenage boys, so I worry for them.

I wrote to my local MP about it and got back much what I’d expected: a cut and paste reply (I could tell because two paragraphs were repeated word for word) telling me about the wonderful things the government is doing to promote foreign investment. Not a word on what I’d asked about. There are many other aspects to the argument: more farsighted aged care policies to free up housing stock, the negative gearing debate and the use of superannuation to fund a home purchase being only three, but they are for another day.

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