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Home equity: Australia’s growing wealth divide

The proportion of renters is now roughly equal to the numbers of outright home owners. Image from

For all our talk about housing affordability, few people want house prices to drop. That’s because most Australians are home owners, and much of our wealth is stored in housing.

But recent figures released by the Australian Bureau of Statistics (ABS) suggest a growing divide between those enjoying the financial benefits of home ownership, and those who may never be able to afford it.

Overall home ownership rates slipped from 69% to 67% between 2011-2012, signifying real change in Australia’s housing system. Age-specific home ownership rates have seen much sharper falls.

Since the Survey of Income and Housing began in 1995, home ownership rates have hovered between 71%-69%, although the proportion of home purchasers (people with mortgages) began to exceed outright home owners in 2004.

By this time Australia’s long housing boom (between 1996-2005) had begun to play out. Younger generations took longer to enter home ownership and needed to take on larger mortgages. As housing equity grew with the rising market, established households tapped into their home loans to finance other purchases, again meaning longer and bigger loans.

While some speculated that Gen Ys were avoiding the responsibilities and commitment of home ownership by choice, a recent survey of Australian university students reveals that home ownership remains an overriding aspiration for younger people. However, affordability (saving a deposit and meeting repayments) is a major concern for these students. Despite relatively bright employment prospects they fear they may never be mortgage free.

Housing and wealth

Home owners are vastly more wealthy than renters. The latest ABS figures show that the net worth of renter households was on average only about 13% of that enjoyed by owners with no mortgage, and about a fifth of the net worth of home purchasers.

Housing equity through ownership has provided an important nest egg for older Australians, with baby boomers the main winners in the housing market. Not only did they buy when prices were far more affordable, but family homes barely affect eligibility for the aged pension. If some retirees might over-invest in their castle, others are using super to pay off their home loan.

But although older Australians generally live in their own homes, home ownership among the over-55s has fallen too. This reflects changing household circumstances. Divorce is one of the flashpoints for falling out of home ownership, especially for women, and many are unable to climb back on the ladder. Older, lone person households are more likely to be in private rental than couples, and their financial future seems grim.

Falling rates of home ownership point to a looming problem. Government expenditure on older people, particularly the relatively low rate for the aged pension, depends on minimal housing costs and the capacity for co-payment (for care) by accessing home equity when the time comes. If older people retire with mortgage debt, and worse, without housing equity, ongoing government obligations for income and housing related payments will rise sharply.

More renters, less equity

The new data shows that while renting was once considered a transitional tenure, the proportion of renters is now roughly equal to the numbers of outright home owners (30.9%), down from nearly 42% in 1995. The proportion of households renting from a private landlord has grown from 18% in 1994-95 to 25% in 2011-12.

Households in public or social housing has fallen from 5.5% to 3.9% over the same period, exacerbating the shortage of affordable homes. Rather than investing in new social housing construction, government housing assistance has shifted to rental subsidy to help low-income earners afford rents in the private market.

Government subsidies for home ownership (largely through preferential tax treatment) amount to around $8,000 per household per year, but renters get only around $1,000 per year. Support for property investment equates to an additional $4,000. All up, that means in excess of $45 billion for home ownership compared to around $8 billion for renting, including concessions for private landlords through negative gearing.

There’s a generational aspect here too – renters and younger home purchasers get much less than older, higher-income home owners without mortgages.

Worse, as the Henry Tax review highlighted, many of these incentives for property investment push up house prices, further disadvantaging aspiring first home owners.

In 2009/10 only 5.2% of houses sold were affordable to those on lower incomes, and 60% of low-income private renters were in housing stress (when housing costs exceed 30% of income). Overall homelessness has grown 17.3% since 2006, with more than 105,200 Australians sleeping rough, couchsurfing, in crisis or temporary accommodation in 2011.

A fairer housing system

In election season, it’s disappointing to see that housing hasn’t really made it on the radar. What can be done to make things fairer?

It’s time to consider real changes to benefit the growing numbers of renters in Australia. The major differences between living in your own home and renting, relate to tenure security and wealth. Reforms to tenancy laws in each state might improve security for private tenants, making rental housing more a choice than necessity.

The Henry Tax Review recommended a number of changes to housing and related taxes, including negative gearing, capital gains and land tax and stamp duties. The review also recommended extending the Commonwealth’s rent assistance scheme for lower-income households, while warning that initiatives to increase the supply of housing affordable for low and moderate-income earners are needed.

We’re still waiting for the tax reforms, so what about affordable housing supply? Demand for housing is concentrated in established, inner-city locations accessible to transport and jobs; where supply is inherently constrained. So, just increasing the overall number of new houses produced in Australia won’t fix affordability problems for those currently locked out of home ownership.

Specific strategies to target the production of housing affordable for these groups are needed.

The federally funded National Rental Housing Affordability Scheme (NRAS) is worth keeping. It provides tax credits (worth $100,000 per dwelling) to investors or community organisations who build and rent dwellings for low and moderate-income earners, at 20% below market rates.

South Australia, WA and the ACT have all introduced programs to increase the supply of affordable homes for purchase, combining planning requirements and incentives, and in some cases, government land or equity sharing.

Design initiatives

Ingenious design may also help. With smaller households and more people preferring to live in inner-city areas near transport, jobs and services, some designers are experimenting with smaller, cost-effective and high-density housing prototypes.

Cash strapped, tech happy Gen Y’s keen to stay in the hood will like the new Yo!Home hitting London right now. A single room transforms to kitchen, diner, lounge or boudoir at the push of a button. It’s cramped, but facebook friends hang in virtual space.

For others, a prefab backyard flat might appeal. Changes to the NSW planning system mean small accessory dwellings (AKA granny flats) are now permissible on most residential lots.

It’s about making sure there’s sufficient housing of all sizes, types and costs in well-located areas. Extending the range of housing options also means sensible and committed strategies for planned decentralisation, in selected suburban and regional centres.

Home ownership rates in Australia have fallen, threatening to deepen the wealth divide. But it’s not too late to make things fairer for aspiring home owners and long-term renters alike.

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