Opinion

Saul Eslake
Pop goes the rental

Australia is in the middle of a 30-year property bubble. It is a bubble inflated by government policy, and every time it looks as if it might burst, governments rush to blow it up further. All bubbles pop eventually, but few are maintained as carefully as this one.

Between January 1991 and September 2017, Australian residential property prices rose by 313.5 per cent. During the same period, Australia’s population grew by 29 per cent. Average weekly ordinary-time earnings for full-time working adults rose by 171 per cent. The consumer price index rose by 92 per cent. The economy itself, as measured by real gross domestic product (GDP), grew by 128 per cent.

For the approximately 3.2 million Australian households who owned at least one property at the beginning of this period – and especially for the almost 750,000 Australians who owned at least one investment property – this dramatic escalation in residential property prices was unambiguously seen as good. Undoubtedly they were made financially better off. The net value of wealth held in residential real estate rose by $5.3 trillion during this same period.

But for the 1.1 million Australian households who were living in rented accommodation at the beginning of this period – a number that by the time of the 2016 census had risen to almost 2.6 million – none of this eye-glazing increase in wealth came their way. The amount they paid in rent did increase, however, from $5.7 billion in 1990-91 to $46.4 billion in 2016-17 – a rise of 713 per cent.

Among this, almost one-third of Australian households who rent were people who, at the beginning of this period and as it continued, would have expected to have been able to step on to this wealth escalator – only to find that they couldn’t.

Between the 1991 and 2016 censuses, Australia’s home ownership rate fell from 68.9 per cent to 65.5 per cent – the lowest it has been since the 1954 census. For people aged between 25 and 34, the home ownership rate dropped by 11 percentage points between 1991 and 2016, to a lower level than it had been in 1954, indeed to only 3 percentage points above where it had been in 1947. For people aged between 35 and 44, the home ownership rate dropped by 12 percentage points, to a level just 1 percentage point above where it had been in 1954. Even for people aged between 45 and 54, the home ownership rate at the 2016 census was 3 percentage points lower than it had been at the 1961 census, and 9 percentage points lower than it had been in 1991.

Hundreds of thousands of would-be first-home buyers – a group for whom politicians of all persuasions routinely profess profound concern – were effectively squeezed out of home ownership by cashed-up foreign buyers and, even more, by investors able to take advantage of more readily available credit and more generous tax breaks.

The share of housing finance going to first-home buyers fell from more than 20 per cent in the mid-1990s to just more than 10 per cent by 2003. Following a brief recovery during and after the global financial crisis, it fell back down to less than 11 per cent again by the first half of 2017. Meanwhile, the share of housing finance going to investors climbed from less than 10 per cent in the early 1990s to more than 40 per cent by 2016.

It wasn’t all growth, although mostly it was. Small steps by the Australian Prudential Regulation Authority saw a limit on more outrageous lending. There were also some controls placed on foreign investment. Between September 2017 and May 2019, residential property prices fell by an average of 8.6 per cent across Australia. They fell by almost 15 per cent in Sydney and by more than 10 per cent in Melbourne – more in nominal terms than they had in the recessions of the early 1990s. Those declines were ruthlessly exploited by the government, and by property interests, as “evidence” of what would occur if Labor were to win the 2019 election and implement its commitment to scrap “negative gearing” for existing dwellings.

Of course, the Coalition unexpectedly won the election. There was a brief revival in the market, stalled by the onset of Covid-19 in March last year. As always happens in Australia when it is feared property prices might fall – and all major banks were predicting double-digit declines – governments moved heaven and earth to ensure they didn’t. State governments committed at least $2 billion over two years to expanded schemes of cash grants or stamp duty concessions to first-time buyers. The federal government put in another $680 million. To cap it off, the Reserve Bank slashed rates to record lows, admittedly for reasons other than propping up property prices.

As it always does with the housing market, government intervention worked. Since September last year, residential property prices have risen by an average of 14.2 per cent – the largest and fastest increase in values in almost 20 years.

Many of the same factors appear to be behind this latest surge as were prevalent between the early 1990s and the previous peak in 2017.

Generous cash grants and tax breaks for first-time buyers “brought forward” demand, funnelling it into a relatively short period and allowing buyers to pay more for homes. The value from this ended up in the pockets of vendors or in the profit margins of builders and developers. Strongly rising prices then attracted the attention of investors, who could capitalise on the eagerness of banks and others to lend at record-low interest rates.

Although negative gearing isn’t as attractive a strategy as it once was – given the decline in interest rates – the most recent data from the Australian Taxation Office shows that 12 per cent of taxpayers (more than 1.3 million people) were negatively gearing a property in 2018-19.

The share of new mortgage loans going to first-home buyers rose in the months after the onset of the pandemic, as elevated cash grants and stamp duty concessions enticed them into the market. But now investors are coming back: their share of mortgage lending rose from just under 23 per cent in the December quarter of last year to 28 per cent in May.

Data from the banking regulator suggests mortgage lending standards are again beginning to decline – albeit not yet as egregiously as they had done before 2015. The proportion of new loans being made on interest-only terms has crept up from less than 16 per cent in the last quarter of 2018 to more than 19 per cent in the first quarter of this year. The proportion of new loans being made at loan-to-valuation ratios of 80 per cent or more has gone from less than 14 per cent in the first half of 2018 to more than 31 per cent in the first quarter of this year. Some of that can be explained by the increased proportion of loans going to first-home buyers, who typically have smaller deposits than those borrowing for the second or subsequent home – but not all of it. The proportion of new mortgages being written with loan-to-valuation ratios of 90 per cent or more has risen from 6.5 per cent in the middle of 2018 to 10.5 per cent in the first quarter of this year.

Australia is by no means alone in experiencing an unexpected resurgence in residential property prices in reaction to the pandemic. It’s happening almost everywhere around the world – including in countries such as Germany, which hadn’t seen rapid growth in property prices over the previous two decades.

It is almost inevitable that when the results of the 2021 census are published they will show yet another decline in rates of home ownership – especially for younger age groups.

The increase in home ownership rates that was achieved during the first two decades of the postwar era – culminating in a peak of 72.5 per cent at the 1966 census – occurred despite Australia’s population growing at a much faster rate than it has done during the past two decades.

That was possible because, throughout that period, the housing policies of the Commonwealth, state and local governments focused on boosting the supply of housing – both by building a lot of housing themselves, and by facilitating the construction of housing by the private sector. Despite the strong growth in the “underlying” demand for housing, the ratio of house prices to average incomes remained relatively steady at around three times.

Starting from 1963, when Sir Robert Menzies promised cash grants to first-home buyers, the emphasis of government housing policies has gradually shifted away from boosting supply to inflating the demand for it.

The almost inevitable result of this shift in housing policy – which was lobbied for by the then president of the New South Wales Young Liberals, John Howard – has been that house prices have risen to six or seven times annual disposable incomes. It now typically requires two incomes to accumulate a deposit and service the mortgage required to buy an average-priced home. As noted earlier, the rate of home ownership is lower than at any time since the mid-1950s.

There is a reason for this. For all the crocodile tears shed by politicians about the difficulties facing those wishing to get their first foot on the property ladder, deep down they know there are far more people who already own at least one property. These people have a very strong interest in policies that result in continued property price inflation, compared with those who don’t own a property but who would like to, and who would prefer, at least until they succeed in their aspiration, policies that restrain the rate of property price inflation.

Sadly, there’s no reason to think that political calculus is going to change. Nor, therefore, are the housing policies that have created the system Australia has today.

This article was updated on July 24, 2021, to correct the increase in average ordinary-time earnings for full-time working adults.

This article was first published in the print edition of The Saturday Paper on Jul 23, 2021 as "Pop goes the rental".

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Saul Eslake is the founder of Corinna Economic Advisory and a former chief economist of ANZ.