Dearer houses: another problem we’re ‘learning to live with’

The poor relation in all our worries – about the pandemic, the economy, climate change – has been housing affordability. While everything else in the economy has been weak, house prices have been rocketing.

I can tell you why they have, and I can say with confidence that house prices can’t keep rising at double-digit rates forever. But I can’t assure you we’ll ever get house prices to rise no faster than we find easy to afford, nor that we’ll ever manage to reverse the steady decline in the proportion of households owning their home.

When I started in this business in 1974, it was at a record 70 per cent. Today it’s down to 65.5 per cent – it’s lowest since 1954 – and almost certain to keep going lower without radical change.

It’s always possible that it’s all a great bubble that one day bursts, bringing house prices crashing down. That, amid all the pain and destruction – all the families being evicted from homes the mortgage payments on which they could no longer afford – the consolation for others would be much more affordable prices.

For the housing market to one day go from boom to bust is almost certain. It’s happened plenty of times before. It’s a myth that house prices always go up and never down.

But in my experience, they’ve never fallen far, nor for very long. They take a breather for a couple of years before resuming their upward march at a more sedate pace. Until the next boom.

Why am I so confident that, over any period longer than a decade, house prices will be higher? I could say it’s because Australians are obsessed by the desire to own their home, and then gradually turn it into their mansion. But Aussies aren’t different to people in other rich countries.

So I’ll just say housing – along with education, healthcare and other things – is a “superior good”. As our incomes rise over time, we spend an increasing proportion of them on our housing.

This is mainly why house prices keep rising. One consequence of the rise of the two-income family was that a higher proportion of their joint income went on housing. What we hope we’d achieve by this was a better house – bigger, better located or better appointed.

It’s true that newly built houses are bigger and better than they used to be, and established houses are always being remodelled and extended. But when lots of people are trying to get a better place at the same time, a lot of the extra borrowing and spending just bids up the price.

It’s much the same story with the fall in interest rates. From their peak of 17.5 per cent in 1989, mortgage rates are now down to about 3 per cent.

Why? Primarily because the inflation rate’s fallen from 9 per cent to less than 2 per cent, but also because the advanced countries have never got their economies working properly since the global financial crisis, and have been using ever-lower interest rates to get things moving.

(Note that, unlike normal people, economists use the word “inflation” to refer only to the prices of ordinary goods and services, never to the prices of assets such as houses.)

The point is, every time interest rates have fallen a bit over the past 30 years people have used the opportunity to borrow more in an effort to buy a first home or move to a better one. Again, when too many people do this at the same time, house prices are bid even higher.

The main reason house prices have soared during the pandemic is that the Reserve Bank has acted to protect the economy by cutting its official interest rate virtually to zero, and we’ve responded the way we always do to lower rates.

So, much of the seeming benefit of lower interest rates ends up as higher house prices – to the benefit of existing home owners and the expense of young aspiring first-home buyers.

The good news for first-home buyers is that, with rates having hit the bottom, this is the last time house prices will soar simply because rates have been cut. So double-digit rises in house prices can’t last.

The bad news for would-be and recent actual first-home buyers – which won’t come for a couple of years yet – is that the next move in rates can only be up.

The rules of the home-ownership game are rigged in favour of existing home owners. That’s because they far outnumber aspiring home owners. And they’re not willing to give up their tax and other privileges to help the younger generation.

Except, of course, their own kids. The Bank of Mum and Dad has played a big part in making seemingly unaffordable house prices able to be afforded – by some.

The ever-rising proportion of Australians who’ll never own their homes are mainly those who failed to pick the right parents. Want proof of the widening gap between the rich and the rest? Look no further than home ownership.

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Home ownership has become a devouring monster

Like all the advanced economies, ours has stopped working the way we’re used to. Our obsession with home ownership is a fair part of the problem.

Let’s be clear: I’m a believer in the Great Australian Dream of owning your own home.

But right now, it’s adding to the economic troubles of many countries. I doubt if the preference for home ownership is causing those countries bigger problems than it’s causing us. We have one of the highest rates of household debt to household disposable income (although ours is made to look worse than the others because of our unusual tax breaks for negatively geared property investments).

Like a lot of people who care about the state of the world we’re leaving to our children and grandchildren (my four-year-old grandson is “helping” me as I write this), I was pleased to see the period of spiralling house prices come to an end a few years back and prices start falling.

But, for Sydney and Melbourne, this sorely needed correction came to an end last year, after three interest-rate cuts and a change in prudential lending rules saw prices resumed their upward climb.

If we can’t cut interest rates a little without an upsurge in borrowing causing us to resume bidding up house prices, we’ve got a problem. Our household debt is at near-record levels, but let’s add to it.

Meanwhile, when you add falling house prices to the economy’s deeper problem of protracted weak wage growth, many home buyers worry and slash their consumer spending to try to reduce their debt.

That huge household debt will be a drag on our economy for years, keeping growth low. Another issue that isn’t helping is our “new normal” of exceptionally low price and wage inflation.

Until recent years, first-home buyers (or any other borrowers for owner-occupied housing) used to be able to load themselves up to the gunnels in debt and monthly payment obligation, secure in the knowledge that, after a few years of high growth in nominal wages, those repayments (little changed in nominal terms) would be reduced to a much more manageable share of their income.

When such “norms” get stuck in people’s heads, it can take years for people to realise they can no longer be relied on. And for those couples for whom the memo arrived too late, they’ll be struggling to keep up their huge mortgage payments for many more years than they bargained for.

So, on one hand we’ve got the economy being held back by households’ huge level of debt and mortgage payments while, on the other, home ownership is becoming unattainable for an increasing proportion of the population. Those who do eventually manage to attain it have to scrimp on other aspects of their living standards, and often get there so much later in their working lives that their ability to save for retirement is diminished.

The devouring monster we’ve allowed home ownership to become is now eroding what’s long been the fourth leg of retirement income policy. More people are retiring without owning a home, whereas the level of the age pension is kept low under the assumption that almost everyone owns their home outright.

Get it? We’re suffering the wider economic disadvantages of huge household debt without the commensurate advantage of a higher rate of home ownership. The rate of home ownership is actually falling slowly as the oldies with high rates of home ownership are dying and being replaced by newly formed, young households, very few of which can afford a mortgage.

But Reserve Bank governor Dr Philip Lowe has injected a note of hope. When measured against the ruler of household income, America’s house prices are much lower than ours. Why? Because of differing policies towards housing. The Yanks have kept land prices lower by allowing more suburban sprawl.

For our part, we’ve had various tax and pension policies seemingly intended to help would-be first-home buyers that, in reality, work to benefit existing home owners. We’ve made housing – whether owner-occupied or rental properties – a tax-preferred investment, not just a means to security of tenure. In the process, we’ve made it too hard for young first-home buyers to afford.

When parents respond to this by recycling to their offspring some of the capital gain they’ve enjoyed on their own property investment (as I have), they’re solving their own children’s affordability problem in a way that keeps house prices high, at the expense of those many young people whose parents aren’t able to help out.

No, if we want to make home ownership more affordable for more young people seeking security of tenure for their home, the answer is to make home ownership less attractive as a form of investment.

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The Great Australian Dream is keeping the economy weak

Do you worry about the enormous size of your mortgage? If you do, it seems you’re not the only one. And the way Reserve Bank governor Dr Philip Lowe sees it, people like you are the main reason consumer spending is so weak and the Reserve and the Morrison government are having so much trouble getting the economy moving.

Until the global financial crisis in 2008, we were used to an economy that, after allowing for inflation, grew by about 3 per cent a year. The latest figures show it growing by barely more than half that. (This, of course, is before we feel the temporary effects of bushfires and the coronavirus.)

This explains why the Reserve cut its official interest rate three times last year, dropping it from a record low of 1.5 per cent to an even more amazing 0.75 per cent. Cutting interest rates is intended to encourage people to borrow and spend. So far, however, it’s shown little sign of working.

Similarly, the first stage of the massive tax cuts that were Scott Morrison’s key promise at last year’s election, a new tax break worth more than $1000 a year to middle-income-earners, was expected to give the economy a kick along once people started spending the much bigger tax refunds they got after the end of last financial year.

Despite Treasurer Josh Frydenberg’s confident predictions, it didn’t happen. Why have the authorities had so little success at pushing the economy along? Why did real consumer spending per person actually fall in the year to September?

That’s what Lowe sought to explain to the House of Reps economics committee last Friday. His theory – which he backed up with statistical evidence – is that, the combination of weak growth in wages with falling house prices has really worried a lot of people with big mortgages.

So, rather than increase their spending on goods and services, they cut it and used whatever spare money they could to pay down their mortgage.

In principle when interest rates fall, people with home loans now have more money to spend on other things. In practice, however, most people leave their monthly payments unchanged. The amount they’re paying above the bank’s newly reduced minimum payment comes straight off the principal they owe, thus further reducing (by a little) the interest they’re charged.

That’s pretty much standard behaviour for Australian home-buyers. But this time they’ve also avoided spending their tax refunds, leaving the money in their “offset account”. They may or may not decide to spend it later. But for as long as it’s sitting in the offset account it’s reducing their net mortgage debt and the interest they’re paying.

But get this: not content with those two moves, households have also decided to cut their consumer spending and so save a higher proportion of their income. It’s a safe bet that people with home loans have got that extra saving parked in their offset accounts.

Lowe makes the point that, when worried home-buyers take money sent their way to get them spending and use it to reduce their debt, this does bring forward the day when they feel confident enough to start spending again. That’s true, but very much second prize.

If people with mortgages are feeling anxious, that’s hardly surprising. By June last year, household debt reached a record 188 per cent of annual household disposable income, before falling a bit in the September quarter (see above). About half that debt was for owner-occupied housing and about a quarter for personal loans and credit cards, leaving about a quarter for housing investment debt.

This is higher than in most rich countries, but that’s mainly because of our generous tax breaks for negatively geared property investors, a loophole most other, more sensible countries have closed.

But hang on. Those of us living in Melbourne or Sydney (but not elsewhere in Australia) know that, in response to the recent cuts in interest rates, people have resumed borrowing for housing, causing house prices to stop falling and start rising again.

Is this a good thing? Lowe can see advantages and disadvantages. On the plus side, rising house prices are likely to make people with big mortgages feel less uncomfortable and so get closer to the point where they allow their spending to grow. It also brings forward the day when the building of new homes stops falling and starts rising again.

On the negative side, is it really a great thing for house prices to take off every time interest rates come down? How’s that going to help our kids become home owners?

Lowe asks whether we benefit as a society from having very high housing prices relative to the level of our incomes. “There are things that we could do on the structural side . . . to have a lower level of housing prices relative to income.” They’re much lower across the United States, for instance, even though, by and large, the Americans’ interest rates have been lower than ours.

What are these “things on the structural side” we could be doing to make our housing more affordable? He didn’t say. But I think he was referring to more liberal council zoning regulations and to getting rid of the many tax concessions that favour home owners at the expense of would-be home owners, including negative gearing.

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This country is run for home owners, by home owners

Name a group that accounts for about a third of the population and rising, is much more likely to suffer stress in affording their housing than other groups, and yet has never had much sympathy from politicians, voters or the media.

Ironically, the bit of sympathy they’ve had in recent days hasn’t been warranted.

They’re the forgotten minority – more forgotten than the forgotten people we keep being reminded about. They’re renters.

They get forgotten because we live in a land where home ownership is the only recognised real estate religion. This country is run for home owners, by home owners.

Now, it may have occurred to you that a supposedly sacred group known as “first home buyers” – actually, would-be home buyers - are renters. Surely a fair bit of sympathy exists for them?

Well, not really. We profess to be sympathetic, but we aren’t. That’s because, as economists get tired of pointing out, all the things we do in the name of helping would-be home owners – first home buyer grants or stamp duty concessions, capital gains tax exemptions for owner-occupiers, even negative gearing – actually benefit existing home owners at the expense of aspiring home owners.

These things add to the demand for homes, relative to supply, and thus push up their prices, making them harder to afford.

Politicians are almost always unwilling to help aspiring home owners by reversing these concessions because they know how angry existing owners would be if they did.

But getting back to renters generally, why do we take so little interest in them and their problems?

Partly because, in a world that values home ownership above all else, renting is assumed to be just a brief transitional state while young people get together the money for a deposit.

Unfortunately, that assumption gets less true as each year passes. When I became a journo in the mid-1970s, we were particularly proud of Australia’s 70 per cent rate of home ownership. It’s been declining, slowly but inexorably, ever since.

Meaning the proportion of renters has been growing ever since. A lot of people still attain home ownership, of course, but it takes them many years longer.

The other reason we take so little interest in renters is that, since almost all of us aspire to own our home, those who never make it – those who stay renting all their lives – are those never able to afford it. And who spends much time worrying about the poor?

But this, too, is becoming less true as the years pass, with a lot more middle-income earners spending a lot more of their lives in rented accommodation.

In the day, we used to rely on “the housing commission” to take the poor off our conscience. In the years since then, the enthusiasm of governments, federal and state, for what we now euphemistically call “social housing”, including “affordable housing”, has steadily diminished – further demonstrating our lack of interest in renters.

The latest report from HILDA – the long-running, government-funded survey of Household, Income and Labour Dynamics in Australia – includes a most informative chapter on renters, by Professor Roger Wilkins, of the Melbourne Institute at Melbourne University.

Wilkins confirms that renters of social housing are 10 percentage points more likely to experience financial hardship than people who own their homes outright. But renters of private housing are 15 percentage points more likely.

HILDA defines “housing stress” as households in the bottom 40 per cent of the distribution of household incomes who spend more than 30 per cent of their income on mortgage payments or rent. (Plenty of high-income households spend more than 30 per cent, but that’s a choice they can afford.)

The proportion of private renters suffering housing stress rose from almost 18 per cent after the turn of the century to 20 per cent by the end of the decade, but hasn’t increased since then.

Of late, some sympathy has been expressed for renters, who must be suffering huge increases in their rent as house prices in Sydney and Melbourne have soared.

Sorry, I’ve looked up the consumer price figures and they don’t compute. In Sydney, over the four years to June this year, the prices of newly built dwellings bought by owner-occupiers rose by almost 20 per cent, whereas rents rose by less than 10 per cent – not a lot higher than the rise in all consumer prices of 7.5 per cent.

In Melbourne, new home prices rose by more than 16 per cent, whereas rents rose by less than half that – only a fraction more than consumer prices generally.

But if soaring rents don’t explain renters’ high rates of financial and housing stress, what does? Their generally low and lower-middle incomes, which have probably worsened somewhat, relative to the rest of us, so far this century.

Note that housing stress is surprisingly low among people of retirement age. That’s because this is the group with by far the highest rate of outright home ownership. The modest level of the age pension takes this fact into account.

But that means those relatively few pensioners who rent privately do suffer much hardship. When a spate of complaints about the inadequacy of the single age pension prompted an investigation, it found that only single pensioners in private rental were doing it tough.

Kevin Rudd responded with a big one-off increase for all single pensioners, plus an increase for married pensioners so they wouldn’t feel left out. As I say, renters don’t count.

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