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.