Homes not costly but deposits are

The RBA pushes the cash rate down to 1.5%, lending rates reluctantly follow and house prices jump by another 7% in the last 12 months.

It’s great news for existing home owners, but not so much for those wanting to buy their first home.

As a result, according to the most recently released Hilda survey, barely half of all adults are classed as being home-owners in 2014 (51.7%) down from 57% in 2002.

Were this trend to continue in a straight line it would be a problem for the country.

Home ownership gives residents a long term interest in the country and their community. It is a store of wealth that has floated many a small business, and the greatest indicator of poverty in old age is being a renter.

It’s become trendy to blame investors and negative gearing for a lack of affordability, but our research shows affordability isn’t the issue.

House prices are rational.

Housing is subject to the laws of supply and demand, but it is also an investment. So its price is also affected by anticipated income and capital returns.

And as no one pays cash for a house, its value is determined largely by repayments.

There is an historical relationship between rent, mortgage repayments and home ownership. When rent is similar to repayments, and there is an expectation that house prices will be stable or rise, there is generally a movement of renters into ownership.

They trade the flexibility of renting for the security of tenure of home ownership and the benefits of investment returns over time, even if it costs them a little more in occupancy costs.

But even though rent and repayments in most parts of Australia are close together, renters aren’t becoming owners.

Our research suggests the deposit is the problem.

In 1991 the median dwelling in Brisbane was $120,000 and could be purchased for 4.72 times average annual earnings. In 2015 it was $475,000 and that ratio was 6.09, 29% more expensive in real terms.

That’s a solid real return, but interestingly, repayments on that dwelling in 1991 were $309 a week, or .63 time average weekly earnings, and today, 25 years later, repayments on the median dwelling would be $614 a week, or .41 times AWE. That’s an increase in affordability of 35%.

So why aren’t purchasers rushing into the market as they were in the 90s?

The answer seems to be the time it takes to save a deposit.

At 10% of AWE before tax, it takes 12.2 years to put aside a 20% deposit today versus 8.9 25 years ago. That’s a significant increase, and many purchasers just don’t have that much patience.

What can, or should, governments do?

Historically state governments have provided first home owners grants which are a taxpayer-funded gift to first home purchasers to bridge the deposit gap.

These grants do work, although they also have an inflationary effect on house prices as well, so reducing the benefit.

It is also difficult to justify gifting $20,000 of taxpayer’s money for a private benefit.

A much more sensible approach, and one for the Commonwealth, would be to regard the house as part of retirement planning.

If you don’t own a house by retirement, the financially smartest thing is to take your super and buy one.

Why not give access to super savings early on to bridge the deposit gap? The end result will be much the same except that the benefits of ownership will supercharge the retirement return providing more assets by retirement. It wouldn’t cost the government anything, improving well-being in retirement, and potentially halving the time spent saving the deposit.

Other solutions could include encouraging inter-generational joint ventures, such as parents lending equity, or mezzanine finance.

The state government’s best role would be to reform planning legislation to ensure a steady stream of new supply, so capping the possibility of scarcity gains in price and ensuring.

The interest rate cycle has just about run its course, which means asset appreciation larger than economic growth will have too. But that won’t erase the deposit gap issue. Part of the stability of Australian society has been that we are a nation of home owners. We all need to ensure that continues.