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Housing Arrangements: Home Ownership
The Productivity Commission, an independent Australian government agency that reviews and advises on social and micro-economic policy and regulations, released a discussion draft on first home ownership in 2003. This report examined price trends and the implications for the affordability of home ownership, especially for first home buyers. The report mainly attributed the recent house price rises to a surge in demand that outstripped supply. Much of this demand came from existing home owners looking to ‘upgrade’. The growth in demand was aided by economic growth through the 1990s, decreasing interest rates and easier access to finance.(SEE ENDNOTE 1)
These price rises have taken place in a society that has traditionally placed great value on home ownership. However, data from the five-yearly Censuses of Population and Housing identify a slight decrease in home ownership among young adults between 1981 and 2001, which may be related not only to changing economic and social circumstances, but also to changing housing preferences among young adults.(SEE ENDNOTE 2)
DELAYING HOME OWNERSHIP?
Reflecting the housing aspirations of successive generations, Australia has consistently had a relatively high rate of home ownership - since the early 1960s, around 70% of occupied private dwellings have been either owned outright or being purchased.
AGE DISTRIBUTION OF HOME OWNERS AND PURCHASERS(a) - 1981 and 2001
PROPORTION OF HOUSEHOLD REFERENCE PEOPLE LIVING IN A HOUSE THAT WAS OWNED OUTRIGHT OR BEING PURCHASED(a)
While the ageing of the Australian population and the policy of supporting older people to stay in their own home for as long as possible are likely to have contributed to this shift in age profile, the greater influence is probably related to declining rates of home ownership or purchase observed among younger age groups, particularly those aged 25-34 years. The proportion of reference people aged 30-34 years, who lived in a house that was owned or being purchased declined by 11 percentage points between 1981 and 2001, from 68% to 57%. Over the same period, the rate for 25-29 years olds declined by 10 percentage points, from 53% to 43%.
The decline in home ownership among younger adults is probably related to marked changes in the ages at which successive generations have moved into different stages of their lives. Most of the stages that relate to an individual’s life path - finishing education, getting a job, leaving home, marrying and having children - are happening at older ages. In addition, some researchers have suggested that another factor in the declining home ownership rates among younger people may be related to changing preferences and priorities among young people compared with earlier generations.(SEE ENDNOTE 2)
Young adults aged 25-29 years who have formed partnerships would be likely to consider home ownership. However, among reference people aged 25-29 years who were married or in a de facto partnership, the proportion who owned or were purchasing their dwelling declined by eight percentage points between 1986 and 2001, from 64% to 56%.
HOUSING INTEREST RATES(a)
The decline in home ownership among young adults mainly occurred between 1986 and 1996, a period which encompassed both recession and persistent high interest rates. It also predated the onset of declining interest rates and the current real estate price boom in the late 1990s. Between 1986 and 1996, the average housing interest rate rose from 14%, peaking at 17% in 1990, before declining to 10% by 1996. Further declines led to an average housing interest rate of 7% by 2003.
INCREASING HOUSE PRICES
In a society that places so much importance on home ownership, house prices are a common topic of conversation and attract a deal of media attention. The most recent dramatic price increase began in about 1998. For the previous nine years, the price index for both project homes (this excludes the value of the land) and established homes had increased at a relatively slow rate. For established homes, the index increased from 100 in 1989-90 to 123 in 1997-98 (i.e. an increase of 23%). In the following five years, between 1997-98 and 2002-03, the price index for established houses rose steeply to 210 (an increase of 71% from the index of 123 in 1997-98). Over the same period, the index for project homes rose to 144 (an increase of 31% from the 1997-98 index figure of 110).
QUARTERLY PRICE INDEXES(a) FOR ESTABLISHED HOUSES, PROJECT HOMES AND BUILDING MATERIALS
The large increase in the price index of established houses compared with the more moderate price increase of project homes, which excludes land values, suggests that increasing land values have had a strong influence on established house prices.(SEE ENDNOTE 1)
The price index for building materials increased at a rate similar to that of project homes, adding weight to the argument that the dramatic increase in house prices is not so much about what it costs to build a house, but more about how much people are prepared to pay to buy a house in a particular location - reflecting high demand and limited supply.
The Productivity Commission's discussion report on first home ownership, published in 2003, suggested that much of the ‘demand’ in the current housing market came from existing home owners, looking to upgrade their properties, in an environment of low interest rates and good economic conditions. The report also suggested that this environment also suited investors looking for capital gains in the property market. The introduction of the First Home Owners Scheme and some changes to capital gains taxation also added to the demand.(SEE ENDNOTE 1)
One contributor to the overall increase in house prices over time has been the rising standard of new housing. New project homes being constructed on the fringes of our cities are larger than in the past, more have four bedrooms and nearly all feature double garages and ensuite bathrooms (Australian Social Trends 1998, Smaller households, larger dwellings, pp. 157-159). Presumably this change has been driven by the growing wealth and aspirations of successive generations.
QUARTERLY RATIO OF AVERAGE LOAN FOR FIRST HOME BUYERS TO AVERAGE ANNUAL EARNINGS OF ADULT MALES EMPLOYED FULL-TIME (EXCLUDING OVERTIME)
...AFFORDABILITY FOR FIRST HOME BUYERS
One way of gauging the relative increase in house prices is to compare a measure of house costs with a measure of income. Any simple comparison can only be indicative, as they are necessarily based on averages of both costs and incomes - both of which have marked geographical differences. In August 2003, the average first home loan ($187,000) was 3.7 times the average annual earnings of a full-time male worker ($51,100) - an increase from a ratio of 2.3 in August 1992. Using the average weekly earnings of a full-time male worker provides a consistent comparison over time. However, this comparison does not take into account how individual incomes may be pooled in households that increasingly have two income earners, fewer children, and thus more disposable income (see Australian Social Trends 2004, Family and Community: national summary, pp. 28-31). In addition, the relatively low interest rates prevalent in the late 1990s and the early 2000s made larger housing loans more affordable.
For further information on disposable household income and housing tenure over life-cycle stages see Australian Social Trends 2004, Household income, pp. 142-145.
The First Home Owners Grant was introduced in 2000, giving first home purchasers a $7,000 grant, coinciding with a brief decline in the ratio of loan size to average weekly earnings. In March 2001, the grant was augmented by an additional $7,000 for those purchasing newly built homes (previously unoccupied). About a year later, this additional grant was reduced to $3,000 before being abolished in July 2002.1 For further information on first home buyers and the First Home Owners Grant, see Australian Social Trends 2003, First home buyers, pp.171-174.
1 Productivity Commission 2003, First Home Ownership, Productivity Commission Discussion Draft, Melbourne.
2 Baum, S and Wulff, M 2003, Housing aspirations of Australian households, Australian Housing and Urban Research Institute, Queensland Research Centre & Swinburne-Monash Research Centre.