Luci Ellis is assistant governor at the Reserve Bank of Australia with responsibility for economics.
For eight years prior to taking that role she was head of the financial stability department at the central bank. This was a period that saw an enormous focus on financial stability as house prices inflated, especially in the eastern states, when interest rates fell. So-called “speed limits” were introduced for lenders to keep a cap on the issuance of investor loans and the financial industry went through significant reforms in terms of capital requirements in a post-GFC world. Regulators globally built stronger and stronger buttresses into financial systems in advanced economies to ward off some of the structural causes of the crisis.
There are many opinions you can listen to in terms of what’s really going on in the property market, but given her experience and position it would be foolish – maybe even reckless – to skate past what Ellis has to say.
Today in Sydney she addressed a conference where the theme was “Housing and inequality”, a burning issue for social policy in Australia at the moment, with Sydney house prices still growing faster than 16% over the past 12 months.
The reasonably short speech is essential reading.
With numbers like this constantly in the headlines, emotions are understandably running high. People who would love to buy a home in Sydney or Melbourne see the requisite deposit and repayments getting further and further out of reach.
Ellis has sought to set out some realities of the housing market in modern Australia. She highlights how demographic issues are playing a part in changes to the housing market. For example, the overall home ownership rate hasn’t really changed much, but because the population is ageing, houses are simply owned by more people in the upper age cohorts.
Then there’s this, on first home buyers:
The 25–34 age group is typically seen as the core group of first home buyers. We can see that ownership rates in this group have fallen by a bit more than 10 percentage points since the 1970s. But we can also see that most of the decline had already happened by the early 1990s, before the big increase in housing prices relative to incomes. What changed during that earlier period was that people started partnering and settling down later in life. The post-war Baby Boom had been characterised by an anomalously young average age at first marriage. Through the 1970s and 1980s, the normal historical pattern started to reassert itself. Ownership rates for young people declined as a result, because many people wait to settle down before they buy a home.
By saying this, I’m not suggesting that people should not worry about whether households can achieve their desired housing tenure. I am suggesting that the situation is more complex than would be suggested by a single-minded focus on a single metric of affordability, such as median housing prices.
Personally I would add that younger Australians are now travelling on gap years and even starting their early careers in the far flung corners of the world. Combined with the tendency to settle down later in life — marrying in their 30s rather than their mid or even early 20s — means the demand mix in the property market has changed. A society like that simply needs more and smaller premises closer to the urban centres.
Ellis left it to the end of her speech to take a pointed swing at the current rental environment, which as many have observed heavily favours landlords. Pointing out that there seems to be an inordinately high number of residency moves by renters in Australia, Ellis said (emphasis added):
… we know that moving house can be disruptive and costly. So I question whether all those moves by renters were desired by those households. Many renters are happy with their current home, but are required to move because the lease expired or the landlord sold the property. If we are concerned about inequality of housing outcomes, perhaps we should focus less on the type of tenure, and more on security of tenure.
Her comments coincided with the release of a major report into renting by the consumer lobby group Choice. “Unsettled: life in Australia’s private rental market” painted a picture of renters afraid to assert their rights fearing a backlash from landlords and agents, with half of all renters (amid 1005 respondents) claiming they experienced some form of discrimination when looking for a rental property in the last five years.
The speech has earned praise from some commentators for trying to grapple with some of the more complex forces at work in the raging debate about home ownership in Australia.
“Ellis is signaling that the housing ownership and affordability is more complex than a simple focus on prices are high relative to income,” according to Stephen Koukoulas, an economist and former advisor to Julia Gillard.
“She notes that demographic issues – such as a later age for household formation means ownership is postponed; more single occupant households reduce the ability to buy which may account for the rise in rent.
“Implicitly she notes that buying a house has always been a financial stretch – either with access to the loan in the days of lending restrictions, or high interest rates and now it is prices.”
There is no doubting housing has become painfully expensive in Australia’s major cities. As we report on Business Insider today, a staggering proportion of Sydney suburbs now have median house prices above $2 million.
But with the issue now increasingly grabbing the attention of politicians, it’s vital to ensure the debate isn’t distorted by blunt arguments about affordability when there are a range of other factors at play.