Submission to the Inquiry into Home Ownership Opportunities for Reform

In considering opportunities for reform, the Bank believes that it is worth bearing in mind that there are both benefits and costs of owner-occupation. The broad policy objective of ensuring that all Australians can access suitable housing at reasonable cost need not translate into an objective that all households should purchase their home early in life, let alone that they should all be able to purchase their first home in their ideal location.

There is nonetheless a clear policy argument for ensuring that there are no artificial barriers constraining households from becoming home owners at some point in their adult lives. The Australian welfare system is designed in such a way that outright (debt-free) home ownership in retirement years is a key part of avoiding poverty in old age. But that does not say anything about when an owner-occupied home first needs to be purchased. Ensuring appropriate housing in retirement could be consistent with a range of home ownership rates for the whole population.

In addition, there are clearly benefits to home ownership that households value. These include having control over their home and its modification, security of tenure and a greater sense of attachment to their home. Academic literature also points to a range of benefits that are correlated with home ownership, including around community engagement and outcomes for children. However, Andrews and Caldera Sánchez (2011) survey this literature and conclude that these correlations do not necessarily imply that home ownership causes these benefits; rather, both outcomes may reflect a separate, common cause.

At the same time, it must be recognised that there are also costs of owner-occupation, meaning that for some households, home ownership is not in their best interests, at least at some points in their lives. For example, households that are likely to move within a few years would face greater costs of moving than if they rented. Some of these costs, such as stamp duty, are within the control of government policy, but legal and real estate agent fees can represent several percentage points of the total purchase price of the property, adding up to thousands of dollars. Because home owners are therefore less likely to move, they are less likely to be able to take up employment opportunities in other locations and might therefore be more likely to be unemployed, all else equal (Caldera Sánchez and Andrews 2011; Oswald 2009). It should be noted, however, that this effect has been difficult to establish with Australian data (Flatau et al 2002; Flatau, Forbes and Hendershott 2003).

More importantly, the purchase of a home represents a large financial commitment to buy a lifetime of housing services up-front. Therefore, this usually involves taking on a substantial debt commitment. For lower-income households or households with variable incomes or insecure employment, taking on a large debt commitment might not be in their best interests, given their current circumstances. The experience of the United States in the lead-up to and during the recent financial crisis demonstrates that households are not well served by being extended credit that they cannot reasonably service; the increase in US home ownership rates that occurred in the years preceding the crisis has proved to be ephemeral. In other words, it would be counterproductive to try to encourage more home ownership by making it easier for marginal buyers to borrow more. Both for this reason and in the interests of financial system stability, the Bank would not support measures that expanded credit supply to households at the expense of prudent mortgage lending standards.

While it is undeniable that more younger households would be able to purchase a home if housing prices were significantly lower relative to their incomes, there are no examples internationally of large falls in nominal housing prices that have occurred other than through significant reduction in capacity to pay (e.g. recession and high unemployment). There is no mechanism to get a large and sustained level shift down in prices while a substantial fraction of the population can – safely and sustainably – service the obligations involved in paying the higher price. Additional housing supply ought to dampen housing prices, and more probably will reduce the growth rate of housing prices that occurs in response to increases in demand for housing. There is, therefore, an argument for government policy to avoid creating unnecessary barriers to supply. However, there is no example in Australia or internationally where supply expansion on its own generated housing price declines of a similar order of magnitude to the increases in prices seen in some Australian cities in recent years; some academic work on this issue suggests that removing supply constraints in a single population centre might not reduce prices significantly (Aura and Davidoff 2008).

Given the value Australian (and other) households place on home ownership, policy should not unduly advantage property investors at the expense of prospective owner-occupier home buyers. Financial stability considerations would suggest that tax and regulatory frameworks should avoid encouraging over-leveraging into property, whether by owner-occupiers or investors.

Reserve Bank of Australia
25 June 2015