Great Aussie Pipedream: rising house prices make us feel wealthier

I guess you’ve heard. Isn’t it great? Australians are now the richest people in the world. But if you find that hard to believe, congratulations. Your bulldust detector’s working fine.

According to Credit Suisse’s annual global wealth report, which tracks wealth in 20 countries, last year the typical adult Australian’s wealth – assets minus debts – reached almost $336,000.

Soaring property prices lifted our median wealth by $38,000, enough to put us just ahead of Belgium and New Zealand. Our residential property prices rose by almost 24 per cent during the year.

We had about 2.2 million millionaires – measured in US dollars – up from 1.8 million in 2020.

So, what’s the catch? Well, I’m sure there’s nothing wrong with the bank’s calculations. And there’s no denying we’re a rich country, whether by this you mean our annual income, or the value of the net assets, physical and financial, of our households.

No, the problem is that so much of our wealth comes from the value of our home. Do you believe our homes are so much bigger or better, or better located, than homes in North America or Europe?

I doubt it. If not, then what we’re really saying is that the land on which our homes are built is much better than the land on which the Americans and Germans – and Kiwis – have built their homes.

Really? We have better views? Better soil quality? Less chance of getting flooded or burnt out?

No. If the market price of our residential land is higher than their market price, it’s just because we’ve bid our prices up higher than they have theirs.

And how exactly does doing that make Australians richer than people in other countries? If it does, why don’t we keep bidding our prices up until we’re twice as rich as we are now?

See what I’m saying? It’s not something economists talk about much but, as former Reserve Bank heavy Dr Tony Richards explained in a speech many moons ago, the notion that the high prices we charge and pay each other for our homes makes the nation richer is an illusion.

“The increase in housing prices has been a mixed blessing for Australians. At one level, rising housing prices have made many people feel [note that word] wealthier and have contributed to higher levels of consumer spending than might otherwise have occurred. But they have also resulted in concerns about housing affordability,” he said.

“The difference in views reflects the fact that housing is not just an asset but also a consumption item. When housing is thought of purely as a consumption item, it would seem that in aggregate we would be better off if its price were lower.

“Because we all need to consume some level of housing services, either rented or purchased, a higher level of housing prices and rents allows less spending on other items.”

Get it? It seems that, as a nation, Australians value owning their own home, and making sure it’s a good one, more than the people in many other rich countries do.

In consequence, we devote more of our incomes to housing than they do, meaning we spend a smaller proportion of our incomes on everything else. So, to that extent, home ownership really is the Great Australian Dream.

It’s because, as a nation, we can never spend enough on improving our own housing position – although how much we can pay is held back by how much our income allows us to borrow – that house prices have become so sensitive to the rate of interest on home loans.

When rates come down a bit – even during a pandemic – our ability to borrow more prompts more aggressive bidding against other would-be owners, pushing prices up. When, as now, interest rates start going up again, thus reducing how much we can borrow, house prices fall back a bit.

Although there’ve been times when we’ve let our building of extra homes fall behind the growth in our population, over the longer term we’ve managed to keep the two pretty much in line.

So, house prices aren’t high because we don’t have enough houses to accommodate every household. They’re high because some houses are better than others – bigger, newer, flashier, or better located, nearer the beach, nearer other well-off people, or nearer the centre of the city – and we compete with others to get the best we can (barely) afford. And because many home owners want to own more than one, as an investment.

As well, prices in the most desirable parts of the city are higher because of government restrictions on packing in more households by building up rather than out.

But here’s the punchline. Just because higher house prices don’t make us wealthier as a nation, this doesn’t stop them making some Aussies wealthier than other Aussies. Which, for many of us, is what we’re after. Housing is one of the main things we’ve allowed to widen the gap between rich and poor.

And I thought we were supposed to be proud of our Aussie egalitarianism.

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A home of one's own: So good only the rich need apply

Slowly – but sooner than you may think – this country, so proud to be a nation of home owners, is turning into a nation of renters.

Perversely, it’s happening because we value home ownership so highly. And we’ve never much worried about what happens to those who don’t make it onto the home owners’ merry-go-round.

Historically, the reason we want so much to own the home we live in is security of tenure. We don’t want to be beholden to a landlord deciding whether we stay or must go.

We don’t want to live in a place where someone else decides if we can have a pet, whether we can knock a nail into a wall, whether the place needs a coat of paint, or when they’ll get around to fixing the leaky toilet.

That’s always been the chief reason for wanting to own the place you live in. What’s changed is that a second motivation has become more prominent in our minds: homes turn out to be a good investment, a good place to put your savings and watch them grow.

Whereas the value of shares goes up and down with the vagaries of the sharemarket, the price of homes just keeps going up and up. (As we’re seeing now, that’s not quite true, but we still believe it.)

And because home ownership is such a national priority, it comes with many exemptions. When we decided to start taxing capital gains in the mid-1980s, we exempted the family home. And, unlike other assets, the home you own is largely ignored when assessing your eligibility for the age pension.

Any savings I invest in making my principal residence bigger and better won’t be subject to gains tax, as most other investments would.

Actually, homes are such a good investment, why don’t I invest in more than one? I’ll have to pay gains tax when I sell, but this time I’ll get a tax deduction on the mortgage interest I pay.

And naturally, being a home owner with a big investment, I’ll make sure the local council knows how opposed I am to people building those terrible high-rises anywhere near my place.

See what happens? The more benefits we attach to home ownership and the more people want to own a house or three, the more they bid up the price of houses. That makes being on the home owners’ merry-go-round an ever-better investment, but that much harder for others to climb aboard.

The more we favour home owners, the more we disadvantage renters. The more we encourage multiple home owning by those who can afford it – which most rich countries stopped doing long ago – the more unaffordable buying your first home becomes.

But not to worry. I’ll just give my kids a leg up in putting a deposit together. Of course, this just keeps home prices high and makes those kids without well-off parents worse off. Tough.

The other thing it does is more sharply divide Australia by making home ownership something only the well-off can afford.

Why don’t the politicians do something about it? Because that would involve reducing the privileges of existing home owners, who’d fight it all the way, led by real estate agents and developers.

There’s always been a minority of life-long renters but, home ownership being the national obsession it is, we’ve never worried about them. Renters have much greater legal rights in other rich countries than they do here, but that’s never bothered us. Renters, we happily assume, are just youngsters on their way to their first home.

This was never true, but it becomes more untrue as each census passes. In a major speech last week, the Grattan Institute’s Brendan Coates said “home ownership rates are falling fast, especially among the young and poor”.

Over the 40 years to 2021, home ownership rates among 25- to 34-year-olds fell from more than 60 per cent to 40 per cent. Among the lowest-paid 40 per cent of that age group, it has more than halved, from 67 per cent to 28 per cent, Coates said.

Last year’s census shows we’ve started seeing accelerating declines among middle-income households too, with noticeable falls in home ownership at all age levels, including older middle-income households.

The proportion of people who reach retirement never having been able to afford a home is increasing, as is the proportion of home owners retiring with unpaid home loans.

I wouldn’t like to be in the shoes of the 70-year-old pensioner living in a small town, who told Tenants Victoria she had to work two days a week to afford the ever-increasing rent on a granny flat in an old house.

We can keep ignoring the poor treatment of renters because they’ll soon get a place of their own, or we can take the controversial measures needed to stop housing from becoming ever-more unaffordable.

But even if we put through all the necessary changes tomorrow, we’d still end up with many more people spending most of their life as a tenant. Time we cared about renters.

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The housing dream that became a nightmare - and isn't over yet

If you think the rich are getting richer, you’re right – but maybe not for the reason you think. It’s mainly the rising price of housing, which is steadily reshaping our society, and not for the better.

We know how unaffordable home ownership has become, but that’s just the bit you can see, as the Grattan Institute’s Brendan Coates outlined in the annual Henry George lecture this week, “The Great Australian Nightmare”, a magisterial survey of housing and its many implications.

But first, let’s be clear what we mean by “the rich”. Is it those who have the most annual income, or those who have the most wealth – assets less debts and other liabilities? The two are related, but not the same. It’s possible to be “asset rich, but income poor” – particularly if you’re living in your main asset, as many oldies are.

The Productivity Commission argues that the distribution of income hasn’t got much more unequal in the past couple of decades, though Bureau of Statistics’ figures for the growth in household disposable income over the 16 years to 2019-20 seem pretty unequal to me.

They show the real income of the bottom quintile (20 per cent block) grew by 26 per cent, which wasn’t much less than for the middle three quintiles, but a lot less than the 47 per cent growth for the top quintile.

Two points. One, the top one percentile – the chief executive class – probably had increases far greater than 47 per cent, which pushed up the average increase for the next 19 percentiles.

It’s CEO pay rises that get publicised and leave many people convinced the rich are getting richer – which they are.

The other point is Coates’: if you take real household disposable income after allowing for housing costs, you see a much clearer gradient running from the lowest quintile to the highest.

The increase in the bottom quintile’s income drops from 26 per cent to 12 per cent, whereas the top quintile’s growth drops only from 47 per cent to 43 per cent.

Get it? The rising cost of housing – whether mortgage payments or payments of rent – takes a much bigger bite out of low incomes than high incomes.

“People on low incomes – increasingly, renters – are spending more of their income on housing,” Coates says.

But it’s when you turn from income to wealth that you really see the rich getting richer. Whereas the net wealth of the poorest quintile of households rose by less than 10 per cent, the richest quintile rose by almost 60 per cent.

And here’s the kicker: almost all of that huge increase came from rising property values.

Other figures show that, before the pandemic, the total wealth of all Australian households was $14.9 trillion. Within that, the value of housing accounted for nearly $10 trillion.

Over the past 50 years, average full-time wages have doubled in real terms. But house prices have quadrupled – with most of that growth over the past 25 years.

Be clear on this: research confirms that the huge increases in home prices relative to incomes in advanced economies in the post-World War II period has mainly been driven by rising land values, accounting for about 80 per cent of growth since the 1950s, on average, with construction and replacement costs increasing only at the rate of inflation.

Coates reminds us that, within living memory, Australia was a place where housing costs were manageable, and people of all ages and incomes had a reasonable chance to own a home. These days, plenty of people even on middle incomes can’t manage it.

It’s obvious that the better-off can afford bigger and better homes than the rest of us. Many probably also have an investment property or three.

But it’s worse than that. Coates says the growing divide between those who make it to home ownership and those who don’t risks becoming entrenched as wealth is passed on to the next generation.

An increasing share of our wealth is in the hands of the Baby Boomers and older generations. The swelling of our national household wealth to $14.9 trillion – largely concentrated among older groups – means there's an awfully big pot of wealth to be passed on, he says.

“Big inheritances boost the jackpot from the birth lottery. Richer parents tend to have richer children. Among those who received an inheritance over the past decade, the wealthiest 20 per cent received, on average, three times as much as the poorest 20 per cent.”

In fact, one recent study estimates that 10 per cent of all inheritances will account for as much as half the value of bequests from today’s retirees, he says.

“And inheritances are increasingly coming later in life. As the miracles of modern medicine have extended life expectancy, the age at which children inherit has increased.

“The most common age to receive an inheritance is late-50s or early-60s – much later than the money is needed to ease the mid-life squeeze of housing and children.”

Coates says large intergenerational wealth transfers can change the shape of society. They mean that a person’s economic position can relate more to who their parents are than their own talent or hard work.

Coates argues that the ever-growing unaffordability of housing caused by present policies – which politicians on both sides keep promising to fix, but never do – is not just making our society increasingly divided between rich and poor, it’s also making the economy less efficient.

In modern, service-based and information-dependent economies, “economies of agglomeration” – benefits from firms and people living and working close together – mean productivity, innovation and wages are greatest in big cities.

But if we don’t pack in enough housing, and so cause house prices to go sky high, we don’t get all the benefits. Long commutes make it harder for both parents to work. The economy becomes less “dynamic”, and productivity is slow to improve. Not smart.

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When house prices soar, everyone forgets who suffers most

One of the darker arts of politics involves manoeuvring to ensure that election campaigns focus on issues that favour my side over yours, regardless of whether these are the issues most likely to be pertinent to the nation’s needs over the next three years.

Because the pollies believe us all to be self-centred, they never try to appeal to the greater good. If the world worked the way it should, you’d expect housing affordability – and what each side was promising to do about it – to be a big issue in the coming campaign, but I doubt it will be.

The Libs won’t want to draw attention to it, and though Labor will make noises about how terrible it is for young people, it’s unlikely to have any serious proposal to take the heat out of house prices. It did take a plan to discourage negatively geared property investment to the last election, but now believes this contributed to its defeat, so has dropped it.

As I’ve said before, since home-owning voters far outnumber would-be home-owning voters, neither side wants to be seen as doing anything that stops homes becoming ever-more valuable.

But if you think that’s all there is to the issue of housing affordability, it just shows how narrowly the politicians – and the media – have shaped our perception of the issue. In all the agonising over house prices and home ownership – which has gone on for as long as I’ve been a journalist – we always forget the renters.

If you define housing as having a place to live rather than to own, renters also suffer when house prices soar. The relationship between house prices and rents is far from one-to-one but, even so, rising house prices usually mean rising rents.

The more the number of people moving from renting to owning is restricted by high house prices, the more the growing number of renters puts upward pressure on rents. Rents are rising much faster than prices in general, or than wages.

Our thinking is still heavily influenced by the Great Australian Dream, which sees renting as a temporary state while young couples save the deposit for a home. In truth, many of the roughly one-third of households living in rented accommodation have never had high enough incomes to afford a home of their own.

So, many people will live all their lives in rented accommodation and their proportion is growing as many middle-income couples who, in former times, would have moved on to home ownership, now do so at a much later age – or go into retirement as renters.

The value of the age pension is based on the implicit assumption that retirees own their home. If so, living on the age pension is tolerable. If not, having to rent privately pushes age pensioners below the poverty line. That’s particularly true of single, usually widowed pensioners.

For many years, the federal government dealt with the problem of people on very low incomes by funding the states to provide a lot of what used to be called “housing commission” accommodation, now called public housing.

Trouble is, the rise of neo-liberalism has made government ownership of housing deeply unfashionable. As the Grattan Institute’s Brendan Coates reminds us in a paper issued this week, the national stock of about 430,000 public housing dwellings has barely grown in 20 years, while the population has increased by 33 per cent.

Whereas in 1991 public housing accounted for about 6 per cent of all housing, it’s now less than 4 per cent. Some of this is made up by government-subsidised “community housing”, but not much.

In public housing, rents are capped at 25 per cent of tenants’ incomes. By contrast, Coates says, the typical low-income private renter pays 37 per cent of their income.

When the Hawke-Keating government turned away from public housing, it shifted to paying rent assistance to people on social welfare. But these payments have failed to keep up with private rents.

The Morrison government says spending on social housing is up to the states. But compared to the feds, the states have a lot less money to spare. Anthony Albanese’s Labor has proposed setting up a $10 billion “housing Australia future fund”, the earnings from which would be used to finance the building of additional public housing.

Coates proposes a fund twice that size, which he calculates would provide 3000 extra housing units a year, in perpetuity. Which, he says, would cost the taxpayer very little. He also wants the feds’ rent assistance to be indexed to the cost of renting.

The point is that when people on low incomes become unable to afford private rents, the next step is homelessness.

If, under pressure from all us affluent home owners, neither side of politics is willing to make home ownership more affordable by removing the many tax breaks that make it so attractive as a form of investment, then the least they – and we – can do is reduce the housing pain of those who really struggle to rent a place.

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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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