The first part of this article explores how home ownership has become almost impossible for most aspiring first-home buyers and how that is creating a much more unequal distribution of wealth. A second part tomorrow will discuss the policy options to restore home ownership and thus a more equal and cohesive society.
Housing affordability and home ownership rates
While the Liberal Party is yet to reveal coherent policies on any issue whatsoever, all the signs are that their Leader, Peter Dutton, is seeking to link migration and housing affordability as major issues at the next election.
Dutton would like us to believe that the strong increase in housing prices reflects the increase in demand from what he calls “Labor’s Big Australia” driven by recent record levels of migration. Furthermore, Dutton would know that increasing home ownership has traditionally played well for the Liberals.
Indeed, the long run of Liberal governments post World War II, under Menzies and his successors, was very much built around increasing access to home ownership. This was seen as a worthy aspiration for all Australians, which would increase their sense of security and self-reliance, while giving them a greater stake in the capitalist system.
As my friend, the late Pat Troy, wrote “home owners were seen as ‘men of substance’, pillars of the community, while renters were seen as feckless transients with no connection with the community and no desire to be engaged.”
In recent years, however, home ownership has steadily fallen as housing has become less and less affordable.
For nearly 30 years between 1970 and the late 1990s house prices and average earnings increased at much the same rate. However, since then house prices have climbed relative to earnings, with the Sydney median house price more than doubling from 7.6 times the median earnings for a full-time male in 2000 to 15.3 times in 2023. Similarly in Melbourne the median house price almost doubled from 4.9 times the full-time male median earnings in 2000 to 9.6 times in 2023.
Arguably Sydney and Melbourne represent special cases, although they do account for 40 per cent of Australia’s population. Even for Australia as a whole, however, the median house price increased from about 3.5 times annualised average weekly earnings during the 1950s, 1960s and 1970s, to about 7.4 times today (note that for full-time persons the median wage is only about 82 per cent of the average wage).
In addition, right now interest rates are significantly higher than they have been in the last two decades. For example, today the typical interest rate on a variable loan is 6.3 per cent compared to 3.0 per cent just before the Covid outbreak in March 2020.
Also, while interest rates have been much higher in the past, with a peak interest rate on housing loans of 17 per cent in 1989, the amount borrowed relative to household incomes was much less back then. Consequently, the burden of mortgage repayments today is much the same as back then in 1989 when the economy stumbled into a recession.
The cost of servicing a new first home mortgage on the average residential dwelling is now above 30 per cent of the mean household disposable income. That effectively means that buying a home is presently unaffordable for most first home buyers unless they get help from the “bank of mum and dad” (see more below).
As Alan Kohler demonstrated in his recent Quarterly Essay “it’s basically impossible now for an average millennial family, earning the national average wage, with one adult working full-time and the other working three days a week, to buy a home for the national medium price” because their mortgage repayments would amount to 42 per cent of their household income.
Not surprisingly, the rate of home ownership is therefore falling. Analysis of the 2021 Census data by the Australian Institute of Health and Welfare shows that “The home ownership rate of 30-34 year old’s was 64% in 1971, decreasing 14 percentage points to 50% in 2021. For Australians aged 25-29 the difference was similar – 50% in 1971, compared to 36% in 2021.”
Indeed, the home ownership rate is less for almost every successive birth cohort born after the post-war 1947-1951 birth cohort, and home ownership will certainly have fallen further since the 2021 Census.
Increasing wealth inequality
Housing and superannuation are by far the most important forms of wealth for most households.
Peoples’ superannuation accounts have increased enormously and become much more evenly distributed since the advent of National Superannuation in the early 1990s and the subsequent increase in contribution rates since then. However, housing is still the major form of household wealth, and the distribution of housing wealth has become much more uneven.
Home ownership rates are falling, and this is significantly increasing the inequality of wealth. Indeed, as already noted, home ownership is practically unaffordable for most first home buyers unless they can obtain financial support from parents.
Most parents are, however, not in a position to provide significant financial support, unless they are prepared to re-mortgage or increase the mortgage on their own home, and most do not want to do this. Sure, aspiring first home owners will eventually inherit a bigger sum of money than previous generations (as elaborated below), but that will be too late to assist them in buying their first home.
Thus, future home ownership, and the consequent distribution of wealth will increasingly be biased in favour of those families which have rich parents.
In addition, this increasing inequality in the distribution of wealth is not only increasing the difference between rich and poor, but also the difference in wealth distribution by age.
Thus, because accessing home ownership used to be easier, home ownership rates are significantly higher for the elderly, with the 2021 Census reporting that more than 80% of people aged between 65 and 75 owned their own home, and mostly without a mortgage. By comparison, for people aged between 35 and 45 their home ownership rate was only 65% and on present trends even when they retire their home ownership will always be around 10 percentage points less than the present retirees aged 65 t0 75.
On the other hand, modelling by the Grattan Institute in 2018 found that “even after allowing for inflation, the average worker today can expect a retirement income of at least 91 per cent of their pre-retirement income – well above the 70 per cent benchmark”, which is widely used to determine an adequate retirement income. As Grattan concluded, “Most retirees today feel more comfortable financially than younger Australians who are still working.”
Although that is not true for the twenty per cent of so of senior Australians who are renting in the private market, but with that exception, it is evident that improving the access of young people to home ownership should be a priority.
The question then is how best to do that.
This will be pursued in the second part of this article tomorrow.
Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations. He is presently a visiting fellow at the Australian National University.
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