The real reason home-ownership is so unachievable

Home ownerships rates have fallen in Australia over the last 15 years. The recent report on Household, Income and Labour Dynamics showed that home ownership rates have dropped from 68.8 per cent of households in 2001 to 64.9 per cent in 2014. The fall among younger age cohorts has been more acute than for older people.

Almost all of the focus of the falling home ownership rates has been on rising house prices as the key factor forcing younger age groups, in particular, to rent rather than buy. Home ownership rates among older generations remain relatively high.

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There is no doubt that high house prices in parts of Australia – Sydney and Melbourne in particular – have played a role deterring younger people from entering the housing market. Saving a 20 per cent deposit for an average house is, for example, roughly twice as burdensome now as it was two decades ago.

Even though record low interest rates have offset the financial burden of servicing a larger mortgage that results from higher borrowings, a 20 per cent deposit on an average loan takes around 100 per cent of average annual household income today compared with 50 to 60 per cent of income in the 1990s.

These issues are very real but they explain only a part of the story for declining home ownership rates. They have been over-emphasised in their importance as reasons behind the fall in home ownership rates.

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In the middle of last year, the Reserve Bank of Australia examined the causes of the decline in home ownership rates, especially for younger people and its findings are enlightening.

In its submission to the House of Representative Inquiry into home ownership, the RBA examined a series of issues that contributed to the fall in home ownership rates. It noted that high and rising prices were one factor, even though ownership rates fell when house prices growth was weak in the late 1990s and early 2000s. The RBA findings, which have received surprisingly little coverage given the near obsession with house prices, were also linked to demographic and societal changes.

The RBA noted that, for younger households, the strong trend in society to later marriage and family formation has seen decisions to buy a house pushed back which as a result shows up in lower home ownership rates for the young. These trends, according to the RBA, “would be expected to have reduced ownership rates”. The reasons why a later age for marriage and household formation are important are linked to the ability of two single people forming a family combining incomes to save a deposit and service a home loan against the difficulty when they try to do it individually. It is s simple point.

The RBA also suggested that higher divorce rates in recent decades and the increasing prevalence of single-parent households is “likely to have weighed on the home ownership rate”. This is important because higher divorce rates means more single income households. Like the trend to later household formation rates, the financial capacity of a single income earner to own a house and service a mortgage is weaker than it is for a couple.

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Rounding out the RBA analysis was its estimate that low rental costs over the past decade, relative to the costs associated with home ownership, has meant a householders have made the financial choice to rent rather than buy. It is a simple price relativity concept. While households that have rented may have not enjoyed the capital growth in house prices in the bulk of Australia, their month-to-month spending for shelter has been lower than for those who have borrowed to buy their home.

The bottom line is that while high house prices have restricted home ownership rates, especially for the younger age cohorts, other social and demographic factors have been influential.

Perhaps the last words are best left to the RBA when it noted that “older age groups are now less likely to own their home outright than in the past”. This is a simple and obvious statement supported by the data which also suggests home ownership drivers are not intergenerational.