The sharp decline in home ownership rates will have far reaching consequences.
The latest instalment of the respected Household, Income and Labour Dynamics in Australia Survey (known as HILDA), released on Wednesday, showed the most pronounced slump has been in the states that host our hottest property markets – Sydney and Melbourne.The proportion of home-owner households in NSW has fallen steadily since 2001 to an historic low of 62.5 per cent. That means the biggest state now has Australia’s lowest home ownership rate. In Victoria the slump was even more acute – down nearly 8 percentage points between 2001 and 2014 to 66.1 per cent. Nationally, the decline has been most pronounced among households headed by those aged less than 45 years.

Housing affordability is measure by the proportion of family income required to meet
loan repayments.
Housing affordability is measure by the proportion of family income required to meet loan repayments. Photo: Arsineh Houspian
A host of social and economic factors have contributed to this major demographic shift. But soaring property prices are a key. Even when today’s super-lower interest rates are taken into account, first-time buyers face more significant barriers than in the past. Saving for a deposit has become a huge hurdle. The Domain Group’s NSW first home buyer deposit affordability index has been setting record highs for the past two years, illustrating the difficulty faced by would-be first time home buyers.

But is a lower rate of home ownership really something to worry about? The answer is yes for at least four reasons:

1. Retirement
Economist Saul Eslake points out that Australia’s retirement income system rests on an “implicit assumption” that most retirees own a home outright. The rate of the aged pension is not designed to cover the cost of housing – pensioners who do rent accommodation can separately receive rental assistance. The slump in the rate of home ownership means more retirees who are non-homeowners and that will put additional pressure on the federal budget. Also, the high cost of housing means more people will reach retirement age with an outstanding home loan. They are likely to use some, or all, of their superannuation savings to pay off the mortgage, potentially leaving them dependent on a part or full pension. Unless pensions become much more generous, the lower rate of home ownership threatens to eventually result in more old-age poverty.

2. Start-ups
It is common for entrepreneurs to use the equity in a home as collateral for loans to establish small businesses, especially innovative start-ups. The decline in home ownership rates, especially among younger households, could take a toll on entrepreneurship by detracting from the rate of small business formation over time. That would have adverse economic consequences given the important contribution small businesses make to employment and activity. The decline in home ownership is especially challenging to the Turnbull government’s innovation agenda and its push to nurture inventive new firms.

3. Wealth distribution
For generations housing has been a key source of wealth accumulation for middle Australia. The HILDA survey shows housing makes up nearly 65 per cent of all household wealth in Australia. But the survey also revealed a growing generational wealth gap driven by patterns of home ownership. Among people aged 65 and over – an age cohort with a very high rate of home ownership – median wealth grew by 61 per cent between 2001 and 2014. That compared with growth of just 3.2 per cent in the median wealth of those aged 25 to 34. The declining rate of home ownership will result in greater polarisation in the distribution of wealth in future.

4. Rents
The decline in home ownership, especially among younger people, has changed the dynamics in the rental market. Eslake says those with relatively high incomes who would once have been owner-occupiers – but who have delayed or abandoned a home purchase because of high prices – means increased competition for rental housing.

“They are pushing up rents in the private rental market to the detriment to a group that in days gone by would always have been in that private rental market,” he said.

“It is therefore a cause of increasing rental stress for low income earners. This is magnified by the fact that the stock of public and community housing has declined significantly as a proportion of the total since the early 1990s.”

A rental affordability index published by Shelter Australia, Community Sector Banking and SGS Economics and Planning last month showed Sydney’s rental squeeze now stretches as far as Blacktown, nearly 50 kilometres west of the CBD. Blacktown was once a haven for families in search of inexpensive accommodation but the index now rates it “moderately unaffordable” for renters.

The sharp decline in home ownership rates revealed by the HILDA survey will have far reaching consequences.