The facts on housing

The reason home ownership creates these economic problems is because the housing asset is largely “indivisible”. That is, you cannot live in a home and only own, say, 50 per cent of it while sharing the remaining risks with outside investors. In a perfect world we would “fractionalise” home ownership. That is, policymakers would foster new markets that allow aspirational and existing home owners to draw on both debt and equity finance, as opposed to the current situation whereby owners are restricted to employing 100 per cent debt.

As I noted in my 2003 report, there is a puzzling incongruity between the financing solutions available to companies and households: whereas companies can raise equity finance in order to reduce their exposure to much riskier debt, households are limited to just debt. This gives rise to the stylised fact whereby households tend to take on extraordinary leverage - up to 95 per cent or more - in order to fund the largest investment they will make during their lifetimes: buying a home. It should, therefore, be a policy priority for households to deleverage their balance-sheets by way of external equity. This is an aim that I have championed since 2001. It has attracted growing support with the advent of the global financial crisis from academic economists, such as Edward Glaeser at Harvard, Luis Zingales at Chicago, William Goetzmann, Ian Ayers and Barry Nalebuff at Yale, and the well-known mathematician Nassim Taleb (of “black-swan” fame).

A related concern is the sometimes excessive veneration of home ownership as a social objective. There is no obviously compelling reason as to why policymakers should be seeking to further boost Australia’s already high rate of home ownership given the current economic endowments of households. On the other hand, there would be potentially considerable benefits to improving the perceived “substitutability” of rental accommodation vis-à-vis owner-occupation. This is not about altering economic incentives; it is about shaping community attitudes towards alternative forms of tenure.

The truth is that as a nation we are unaffected when house prices rise or fall from a pure wealth perspective. In this regard, Dr Richards quotes Bajari, Benkard and Krainer (2005) who find that:

To a first-order approximation, there is no aggregate change in welfare due to price increases in the existing housing stock. This follows from a simple market clearing condition where capital gains experienced by sellers are exactly offset by welfare losses to buyers.

There is around $4 trillion worth of private housing held in Australia. At least $1 trillion worth of debt is secured against it. Yet it is arguably the most misunderstood part of the economy. It is time economists and commentators spent less time sprouting vacuous mis-truths about housing and more effort trying to understand what makes it tick.