Tuesday, September 14, 2010

Home ownership out of reach

IN 1986, 68 per cent of middle-income Melbourne households headed by people aged 25 to 44 owned their own home. By 2006, only 57 per cent of the equivalent group were home owners. The slide was even sharper in Sydney: from 60 per cent to 45 per cent. The blame game over Sydney's problems have missed a basic point: young people have left Australia's biggest city to go somewhere they can afford to buy a home.

One day, they could have to leave Melbourne, too.

What is so remarkable about this slump in home ownership rates, say Flinders University housing experts Joe Flood and Emma Baker, is that it happened in an era of rising employment and prosperity. Gross household income rose 23 per cent in the decade to 2006. Workforce participation rates hit record highs. Normally, that creates more home ownership. This time we saw less.

"It appears that the benefit of higher household incomes in the benign decade 1998-2007 went into pushing up house prices and debt, rather than improving home ownership or increasing the stock of housing," they conclude in a new paper for the Australian Housing and Urban Research Institute.

"The country that promised limitless land, cheap housing and near-universal home ownership to all comers now has some of the most expensive housing in the world.

"High house prices act as a drag upon growth and competitiveness, have exaggerated inequities of wealth and intergenerational equity, and they will eventually increase the welfare burden on the community."

Anyone disagree with that? All of us who own a home feel good about seeing its value rise until we have to buy another home, when we find it's just inflation. The wealth it confers is illusory, unless you take your money out of housing, and invest it somewhere else.

And the cost of those prices is that a million or so young and lower-income Australians who want to buy a home of their own are now unable to afford a home that suits them. It has been a classic case of policy failure the more so, as the Reserve Bank has pointed out, because the tide of rental investment that has pushed up prices is essentially tax-driven.

It's one of the big problems that a bold, reformist government should take on. Yet the new Gillard government no longer has a minister for housing. Social housing has gone to Mark Arbib, and hopefully that means the senior portfolio minister, Jenny Macklin, amid all her other responsibilities, will now take charge of the issue herself to drive reform.

Housing prices are primarily an issue disadvantaging the young. But Flood and Baker highlight other lesser-known victims. In the 45-to-64 age group, between 1986 and 2006, the proportion of lower-middle income households in Melbourne without their own home rose from 19 per cent to 28 per cent, and in Sydney from 26 per cent to 40 per cent. And in the lowest income group of that age, 53 per cent are no longer home owners in Sydney and 40 per cent in Melbourne.

That implies, they warn, that in future many, many retirees will not own their homes, and will require costly rental assistance.

Flood and Baker see three ways to tackle the problem. As the libertarians argue, we could end zoning, and allow people to build anything, anywhere: but any government that did so would not be re-elected. And the huge price rises in Melbourne despite ample zoned land shows that's not the problem.

A second option is to limit finance, as China has. With reports that banks are now offering close to 100 per cent of loan valuations again, one serious option is to bring back the old 80/20 rule, requiring borrowers to put up 20 per cent of the property's value as a deposit. But, as Flood and Baker note, in the short term that would hurt the groups you want to help.

They argue instead for a range of targeted solutions. Some would require tax reform and a lot of political courage: taxing the capital gains on owner-occupied homes, and quarantining negative gearing by preventing owners using rental losses to reduce tax, except for new housing projects.

Other proposals include programs to build more affordable housing, and to tackle the rapid fall in home ownership among lower-income over-45s.

The weakness of their paper is that it looks for demographic reasons for the fall in home ownership, when it is clearly the result of competition from housing investors.

In the 1980s, 85 per cent of finance to buy existing homes went to owner-occupiers and 15 per cent to investors. In the '00s, investors' share averaged 41 per cent. In Victoria, in May and June 2010, investors buying existing homes got 51 per cent of bank finance, and owner-occupiers 49 per cent.

You cannot have investors increasing their share of the market without squeezing out the first home buyers. It's a zero-sum game, and politicians such as Wayne Swan who give $5 billion a year in tax breaks to investors are in effect blocking young and low-income buyers from owning a home.

Oh no, they say, you can't take away the negative gearing tax break without creating a shortage of rental housing. Yes, you can.

Aspiring first home buyers are mostly renters. When they buy a home, they cease to rent. There is one less home to rent, but one less household wanting rental housing. Supply falls by one, demand falls by one, and the net balance is unchanged. The market does not tighten. Rents do not rise. Families are not thrown out on the street.

This is an issue ripe for a reform government that is prepared to lose some skin to make Australia work better.

The paper is at www.ahuri.edu.au