There’s a brutal mathematical explanation for the fall in home ownership among young Australians

Australian house prices continue to push higher while at the same time home ownership levels are falling, particularly among younger Australians.

According to the latest Household, Income and Labour Dynamics in Australia (HILDA) survey released by the Melbourne Institute, home ownership rates among those aged 25 to 34 years fell from 39% in 2002 to 29% in 2014, a decline that has been mirrored across all age groups over the same period.

Source: CBA

While low home ownership among younger Australians isn’t anything new, Michael Workman, senior economist at the Commonwealth Bank, argues there’s been a major change over the past 15 years that has exacerbated the decline in ownership levels among young Australians: house prices have risen substantially faster than income levels, increasing the difficulty to save for a deposit.

He explains:

The relatively high deposits, sometimes up to 20% of the house price, are correctly seen as the major barrier to home purchase by all age groups. Although recent competitive pressures have reduced the deposit percentage, lenders still usually sought mortgage insurance (LMI) if the loan to value ratio (LVR) was above 80%. The LMI usually lifts the monthly mortgage payment until the LVR is below 80%.

The problem with higher house prices is that the dollar value of the 20% deposit rises with the lift in house prices. The 20% deposit currently required is the equivalent to a whole year’s average household disposable income. It obviously is taking longer to meet that requirement because house prices are rising much more quickly than household disposable incomes.

If a house that costs $500,000 increases by 5% in a year to $525,000, the additional amount of savings required just to maintain the 20% deposit level to avoid LMI rises by a further $5,000, before tax.

For many people who live in Australia’s largest cities — those that are the most expensive and have seen the largest capital appreciation over recent decades — the problem is exacerbated.

While there are other factors that have contributed to the decline in home ownership levels among younger Australians — a greater tendency towards tertiary education (and the debt often accumulated), slower household formation and a preference by some to rent — for those who want to own a property, Workman has hit the hammer on the head.

As house prices rise faster than incomes, it makes it more difficult to save for a deposit. Interest rates or servicing a mortgage is not the issue, he says.

“The significant barrier is saving the deposit in the first place, rather than being able to service the loan,” he says. “Especially when mortgage rates are currently in the 4%pa to 5%pa range. Lenders will generally lend up to 300% of the borrower’s household income once the 20% deposit is met.”

The chart below from the CBA shows the proportion of annual household disposable income that it costs to save a 20% housing deposit. Not only is it moving higher after a decade of relative stability, it must be remembered that many households now have dual incomes where as in the past there was, in most instances, only one.

Source: CBA

While Workman suggests that the record levels of new housing construction should improve housing affordability, he suggests that there “also needs to be some changes to Federal and State tax policies if Australia is to provide sufficient affordable housing to meet demand from the 30 million people and 12 million households coming in 2030”, an increase of 25% from current levels.

Though the debate on that front has centered around the use of negative gearing by housing investors — cited by some parties as exacerbating housing affordability concerns since it was coupled with a reduced capital gains tax in the early 2000s — the other area of that needs to be addressed is tenancy laws at a state level.

With a larger proportion of Australians unable to purchase a property, leading to a rise in the percentage who are renting, there are valid grounds to provide tenants with more rights than what they currently receive.

Renting, particularly for those with young families, is fraught with uncertainty, with factors such as schooling, work and lifestyle, let alone a roof over their heads, dictated by the decisions of their landlords.

If nothing else comes of housing market reform, providing those who rent with more than a few weeks of certainty is one area that needs to be addressed.