Growing cohort squeezed out of property market, says economist

Independent economist and University of Tasmania vice-chancellor’s fellow Saul Eslake appeared before the House of Representatives tax and revenue committee for its ongoing inquiry into housing affordability last week.

According to Mr Eslake, as housing prices have surged, more and more Australians under the age of 40 have been squeezed out of home ownership.

By looking at census and HILDA survey data from 206 and 2019, as well as the home-ownership rate in 1996, the former ANZ chief economist has calculated a gap of around 12 per cent in households that would have owned their home 25 years ago, compared to now.

Factoring in that the decline in home ownership would have been considerably sharper for those under the age of 45, while those older than 65 would have a rate consistently above 80 per cent, he has adapted the 12 per cent estimate into a range of 10 to 15 per cent.

“These are people with reasonable incomes that allow them to quality for and service a mortgage without undue stress but who, because property prices have risen at faster rates than their incomes over the last 30 years, have nonetheless been unable to purchase a home,” Mr Eslake told the committee.

While the ratio of house prices to incomes has roughly doubled over the last 30 years, the proportion of income absorbed by debt service has declined because of the fall in interest rates since the early 1990s.

Mr Eslake noted “servicing a mortgage is in principle not much more difficult than it was, say 30 years ago”, but interest rates will not always remain at record lows.

At the same time, the low rate environment has contributed to the largest hurdle for aspiring buyers, saving the deposit.

“Because property prices have risen at roughly twice the rate of incomes, you could, as a crude simplification, say it has become twice as hard to accumulate a deposit by saving the same percentage of your income,” he said.

“Because interest rates are lower and most people save their deposits on houses in the form of bank deposits, the additional assistance they get from the return on that deposit as they save for it is much less. So saving for a deposit has become both a bigger task and a more difficult one to achieve for any given level of deposit than it would have been 20, 30, 40 years ago.”

Property investors have also played a role, by increasing the “demand for rental housing by squeezing out people who would have otherwise bought those properties in order to live in them,” Mr Eslake argued.

He recommended the removal of tax concessions for investors, noting the equivalents of negative gearing had been abolished in the US and in the UK by conservative governments.

“I would say, if you dampened some of the demand that has come from investors over the last 25 years that has clearly contributed to upward pressure on property prices, you would probably do more than any other single thing to slow the rate of increase in house prices,” he said.

Further, having more people forced out of home ownership is expected to create issues for other enters. Mr Eslake reflected on the 10-15 per cent cohort whose incomes would have been enough to buy a house previously.

“Because those people are reasonably well-off they can afford to rent in the private rental market,” he said.

“But because those people can afford to pay private rents, they’ve forced up the rents that are faced by people who never would have been able to own their own homes and have thus compounded the difficulties that those people who would always [be] lifetime renters faced.”

The economist cautioned there will be longer-term consequences for Australia’s retirement income system, when more and more people exit the workforce without ever owning their home, while social and public housing supply has not kept up with demand.

He also warned that a side effect of declining home ownership could be a negative impact for the small-business sector.

“It’s very common for someone who starts a small business to have their house on the line in order to get the finance they require,” Mr Eslake said.

“Indeed, I’d argue that among the longer term adverse consequences of the decline in homeownership rates in Australia is that it may be more difficult for people to start and operate small businesses because fewer of them will have homes that they can use as security for business loans.”

During other hearings for the housing affordability inquiry, researchers added to calls for the government to set a national housing agenda and to assign a minister for housing.

Reserve Bank of Australia assistant governor (economic) Luci Ellis acknowledged that maintaining the cash rate at record lows had pushed up house prices by allowing consumers to service a larger mortgage on the same income.

However, she stated the alternative, a higher cash rate, would have resulted in higher inflation than offshore peers and economic instability.

Meanwhile, three of the big four banks have tipped that the surge in house prices will moderate in 2022, before seeing some level of reversal in 2023.

ANZ has projected a 4 per cent fall in 2023 following a 6 per cent rise across capital cities in 2022.

CBA has forecast the largest fall of 10 per cent in 2023, after a 7 per cent rise in 2022.

Westpac on the other hand has projected 8 per cent price growth in 2022, before a 5 per cent correction in 2023.