Restoring home ownership requires substantially lower house prices – and for most existing homeowners, falling property values need not leave them materially worse off.
Housing affordability has declined dramatically over the last half century, and particularly in this century. As a result, home ownership has fallen substantially, particularly among young people who want to buy their first home.
For example, census data show that home ownership among 30–34-year-olds fell from 64 per cent in 1971 to 50 per cent in 2021, and for 25–29-year-olds it dropped from 50 per cent to 36 per cent.
The overwhelming reason for the decline in housing affordability has been the increase in dwelling prices.
According to research by the Grattan Institute, average dwelling prices represented around two to three times average disposable incomes in the 1980s and early 1990s. By comparison, today the national median dwelling price is approximately 8.2 times the median, or typical, annual income. While in Sydney – one of the most unaffordable housing markets globally – the median house price-to-income ratio is around 13.5.
As a result, it now takes 1.9 average incomes to comfortably service a mortgage for a median-priced dwelling in Australia’s capitals, whereas an affordable home loan should be serviceable with no more than 30 per cent of the annual income of a single average income-earner.
The obvious conclusion is therefore that too many people will never own their homes unless housing prices fall.
Yet the Opposition is seeking to make a political issue of the small fall in house prices over the last six months, blaming the government.
This is especially strange given the importance that the Liberal Party has traditionally attached to home ownership. Indeed, Sir Robert Menzies, the founder of the Liberal Party, in his famous ‘Forgotten People’ speech in 1942 spoke of the importance of home ownership, maintaining that “the home is the foundation of sanity and sobriety; it is the indispensable condition of continuity; it’s health determines the health of society as a whole”.
For Menzies’ Liberals, home ownership reinforced the electorate’s conservative instincts in favour of security, stability, continuity and local loyalties.
Today, however, home ownership is falling, and the only way that it will be restored is if dwelling prices fall. Yet today’s Liberals want to disparage that and effectively ignore their traditional values.
But probably what motivates this change in traditional Liberal values is that too many of us homeowners are strongly opposed to lower house prices. While, as Ross Gittins has pointed out, politicians are motivated by the fact that “The number of voters owning their home far exceeds the number of voters who, at that point in time, are seriously trying to afford a mortgage.”
The problem is that our home typically accounts for most of our wealth, and we don’t like it if we become less wealthy. We assume that a fall in our personal wealth means that we are less well off.
Certainly, that is true for many forms of wealth. For example, if your bank account or the value of your financial investments decline, you do have less money to spend.
I would contend, however, that housing is different. First, housing is a most illiquid asset, and it is hard to tap part of it for other purposes. Second, and most importantly, the value of the services that one gets from one’s home, such as shelter and quality of life, stays the same irrespective of any changes in the dwelling’s market value.
Furthermore, even when one decides to change home, any fall in the price of the old home will most likely be matched proportionally by a similar fall in the price of the new home. So the fall in dwelling prices typically does not damage the homeowner.
The only time that a fall in dwelling prices does damage the homeowner is if they sell their home and no longer want to own their own home. But that is typically when they die, and their wealth is then of no use to them.
If we really care about housing affordability, and we should, then we need to embrace lower house prices. Nobody would really be much worse off, and young people would be much better off.
However, the present fall in dwelling prices is in response to financial market conditions and is likely to be fairly short-lived and not exceed much over a 10 per cent fall.
Restoring housing affordability will require a return to a much lower ratio of house prices to incomes. But that lower ratio cannot be achieved by increasing incomes, which given the size of the change required would be highly inflationary.
Instead, we need a much bigger fall in dwelling prices. Realistically that will take quite a long time and will only happen if the supply of housing is substantially increased, and increased where people want to live, not too far from where they work.
That in turn means that governments need to have the courage to take on the NIMBYs and explain why increasing housing supply and density will not really damage them, while benefiting the next generation and our society more generally.
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.