In her opening Statement to House of Representatives Standing Committee on Economics Inquiry into Home Ownership, Luci Ellis, Head of Financial Stability Department makes a telling point. From the RBA’s perspective, financial stability is more important than easing lending standards for first time buyers. They also recognise that the rise of investors is pushing prices higher, and excluding some FTB market aspirants. No reference though to the changed behaviour of FTB who are now going direct to the investment sector, a significant move in our view, as recently discussed. They also see property as a saving vehicle for old age which is further recognition property is regarded as just another asset class from a wealth accumulation perspective.
The Reserve Bank recognises the importance of housing to Australians: it provides us with shelter; housing costs are a large part of household spending; and a home is the biggest purchase that many of us will make. It is therefore no surprise that housing-related issues have been the subject of several inquiries over the past decade or so.
Within that broader realm of housing, the Bank recognises that home ownership is an aspiration of many Australians. Outright home ownership is widely regarded as key to avoiding poverty in old age. Before that life stage, home ownership is also regarded as a way to obtain the security of tenure that is so important to the wellbeing of many households, especially families with dependent children. Security of tenure can allow households to enjoy stable arrangements for education, child care and community engagement; it avoids the costs and disruptions involved in frequent moves, which many renters experience.
The interest of the Reserve Bank in housing-related matters goes to the heart of its mandated policy responsibilities. The housing sector is one of the most interest rate sensitive parts of the economy. So a significant part of the transmission of the Board’s monetary policy decisions to the real economy comes via housing markets.
Housing market developments are also highly relevant to the Reserve Bank’s mandate to promote financial stability. Housing is the most important asset class for the household sector; it provides security for the finance of many small businesses; and housing-related lending represents a large fraction of the business of the Australian banking system. History shows that housing loans have not generally been as risky as other loans, but such is the size of the sector, the risks involved are nonetheless important. Recent history from around the world also shows that although households’ mortgage borrowings typically do not instigate financial crises and distress, they can do so if the institutional arrangements and lending standards are configured to allow it. Australia is a long way from that situation and we want to ensure that remains true. More broadly, we want to promote financial stability by making sure that Australians are generally resilient to the financial shocks that might come their way. How much they pay for housing and how they finance that purchase strongly influence their resilience.
As the Reserve Bank’s submission to this Inquiry outlined, trends in the housing market and in patterns of home ownership have shifted over recent decades. Perhaps the most obvious shift was the significant increase in housing prices relative to incomes between the late 1990s and mid 2000s. As the Bank has explained on previous occasions, most of this increase was in response to financial liberalisation and to the decline in inflation in the early 1990s. These were one-off changes, so this transition will not be repeated. And because the rise in housing prices was largely driven by a decline in mortgage interest rates, it does not necessarily imply that purchasing a home and servicing a mortgage afterwards has become less achievable. Indeed during this period, Australia’s overall home ownership rate was broadly stable. At the same time, the amount and quality of housing that Australians actually consumed, in terms of size of home, number of bedrooms and so forth, has, if anything, increased.
Of course, beyond these broad aggregates, people’s individual circumstances differ, and therefore so do their housing experiences. Within that broadly stable overall rate of home ownership, the rate for younger households has declined somewhat over time. These are the core age groups of first-time buyers. At least some of that decline occurred before the marked rise in housing prices relative to income, so it cannot all be attributed to affordability issues.
Whether home ownership is affordable depends on one’s definition and is open to debate. But there is no disputing that housing is expensive. It is clear that part of the reason for this is that demand is strong. Over the longer term, this can be at least partly explained by the effects of disinflation and financial liberalisation that I referred to earlier. More recently, demand has been boosted by population growth and by declines in interest rates.
As also noted in the Reserve Bank’s submission, Australia faces a number of longstanding challenges in meeting that strong demand. The population is highly urbanised and concentrated in a few large cities, and housing prices are typically higher in large cities. Australia’s cities are unusually low density compared with those in other developed countries, so the urban fringe locations where first home buyers have typically located are therefore becoming further out and potentially inconvenient for access to jobs and some services. Some of our major cities also face geographic constraints on their expansion. All of these factors tend to increase the price of well-located housing. In addition, the cost of providing new supply can be quite high because of the costs and delays involved in obtaining all the necessary approvals and in providing the necessary infrastructure to service the land.
Another area where Australia seems quite unusual is that most rental housing is owned by private individuals who are not full-time professional landlords. Investor interest in property has been especially strong in recent years, no doubt partly encouraged by low interest rates and the prospect of (concessionally taxed) capital gains. Investors typically have more equity and borrowing capacity than first home buyers and perhaps also other owner-occupiers, and might therefore be more able and willing to pay higher prices than other types of buyers for particular properties. The result has been that the housing sales market has become unusually concentrated in investor activity, particularly in the larger cities. At the margin this has probably priced some aspiring first home buyers from properties they could otherwise acquire. Nonetheless, while there has been much debate on this issue, from a financial stability point of view it is helpful that there has been no push to improve the position of first home buyers by easing lending standards. As recent experiences in other countries have shown, such a step would probably be counterproductive in the longer run.
