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In praise of renters

By Andrew Leigh - posted Friday, 8 May 2009

Firsts are invariably memorable. Whether it’s a first love, a first job, or a first rock concert, there’s something that sears the memory. So it’s little surprise that canny politicians have decided that when it comes to first homes, they want to be a part of the experience, in the hope that the voters might repay the favour when the next election comes around.

The conservative side of politics tend to argue that we should subsidise home ownership because it encourages economic independence. In the words (PDF 1.16MB) of Robert Menzies: “one of the best instincts in us is that which induces us to have one little piece of earth with a house and a garden which is ours.” For Labor, home ownership ought to be subsidised on equity grounds. As Gough Whitlam once said (PDF 1.16MB): “It is the people's land, and we will fight for the right of all Australian people to have access to it at fair prices.”

Over the years, the benefits of home ownership have been mythologised by social commentators. An array of lobby groups - from builders to real estate agents to social housing advocates - have touted its advantages. Yet little has been said about the downside. Just because many people eventually buy a house (disclosure: I am one of the 70 per cent of Australians that own my home), it does not follow that governments should subsidise first home purchases.


The strongest evidence against home ownership comes from Andrew Oswald (PDF 33KB), of Warwick University, whose research (PDF 33KB) has shown that countries and regions with higher rates of home ownership tend to have more unemployment. Across Europe, Oswald compares Switzerland, with a home ownership rate of 37 per cent and an unemployment rate of 3 per cent; with Spain, which has a home ownership rate of 85 per cent and an unemployment rate of 17 per cent. The explanation for the link is that owning your home tends to lock people into the local labour market. When a region suffers a local downturn, it is easier for renters to follow the jobs. By contrast, owners may opt to stay put. Higher rates of home ownership make for less flexible labour markets.

This is particularly true of Australia, where stamp duty imposes a heavy penalty on residential mobility. In some other parts of the world, residential turnover taxes are about the price of a bicycle. Here, the cost of stamp duty on a given house is likely to be pretty close to the value of the car parked in the driveway.

The potential lock-in effect of home ownership is particularly important when thinking about the First Home Owner Grant. Early in their careers, young workers often switch jobs a few times until they find the firm that is the best match to their talents. But buying a house too early can curtail this process, with the result that employees might end up in jobs that are a bad fit for them in the long run. Alternatively, high levels of home ownership can increase traffic congestion, as job-switchers end up driving across town to get to work.

Another downside of home ownership is that having virtually all your wealth locked up in one piece of property is a risky investment strategy. Although Australian property prices have risen substantially over the past decade, local housing markets can be volatile. Just as government policies on superannuation encourage diversification, housing policies should not push young Australians to over-invest in a single housing asset.

Introduced by the Howard Government in 2000 as compensation for the GST, the First Home Owner Grant has proved as difficult to dislodge as any other piece of middle-class welfare (actually, this one is more like upper-class welfare). In response to the looming recession, the federal government has recently increased its value to $14,000, or $21,000 for newly-built homes. Some states offer generous top-up programs. For example, if you buy a new home in regional Victoria, the state government will kick in an additional $8,000.

With the federal grant due to be reduced on June 30, 2009, the government is under pressure to extend the generous credits. In making the decision, they would do well to consider Oswald’s research on the link between home ownership and unemployment. This suggests that as a society, we should be pleased that many young people are renters, and refrain from pushing them to buy too soon. (For similar reasons, public housing should be no more generous than rent assistance.)


Subsidising home buyers may be a good job creation scheme for real estate agents and builders. But if it locks young families into jobless regions, we might end up with a longer recession.

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First published in the Australian Financial Review on May 5, 2009.

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About the Author

Andrew Leigh is the member for Fraser (ACT). Prior to his election in 2010, he was a professor in the Research School of Economics at the Australian National University, and has previously worked as associate to Justice Michael Kirby of the High Court of Australia, a lawyer for Clifford Chance (London), and a researcher for the Progressive Policy Institute (Washington DC). He holds a PhD from Harvard University and has published three books and over 50 journal articles. His books include Disconnected (2010), Battlers and Billionaires (2013) and The Economics of Just About Everything (2014).

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