Downsizing may not be the dream solution


In Australia, the generation gap has become the accommodation gap.

The dizzying rise in house prices, which have far outstripped incomes, especially in Sydney and Melbourne, threatens to deprive many young people of what many considered a generational birthright in post-war Australia, the opportunity to call a place your own.

But a leading public policy think tank has questioned whether the frequent call, as made by Treasurer Scott Morrison among others, for older property owners to downsize will help revive the Great Australian Dream of mass home ownership.

Grattan Institute economist Trent Wiltshire has been part of a six-month project looking at the extent, causes and possible solutions to unaffordable housing.

“It’s certainly looking bleak for the younger generations,” Mr Wiltshire said

“I think it’s reached a tipping point now where people realise things have changed and it’s going to be very hard for a lot of younger people who are going to miss out on what was considered the normal thing, to own your own home, by your 30s and 40s.”

In the 1950s, 70 percent of households owned their homes. It is only recently that this has declined to 67 percent, but that figure doesn’t convey the reality that some categories of people are effectively locked out of the property market.

“Where you see the big falls in home ownership are among the younger age groups,” Mr Wiltshire said.

“And it is even more significant among the younger and poorer households. People in the lowest 20 percent of incomes have seen the biggest falls.”

In the lowest earning segment of 25 to 33-year-olds the rate of home ownership has plummeted from 60 percent to 20 percent.

“It used to be that if you were wealthier you were more likely to own a home but it wasn’t a massive determinant. Now being a low income earner means it’s really, really difficult to own a home,” Mr Wiltshire said.

This has significant effects in creating and entrenching inequality across the socio-economic spectrum and between generations.

“Income inequality hasn’t changed but you see this big change in wealth inequality and that’s mainly due to these rapid increases in house prices in the major cities,” Mr Wiltshire said.

He said that on average 65 to 74-year-old homeowners are $400,000 wealthier than 10 years ago, thanks to the appreciation of their properties, while 55 to 65-year olds are $300 000 better off.

Meanwhile, the wealth of 25 to 34-year olds has remained the same.

Mr Wiltshire said that for young people, being able to own a home or even afford a deposit was increasingly dependent on help from family and friends, whether that be inheritance or gifts or others acting as guarantors of loans.

“That’s a worrying trend that it will depend more and more on how wealthy your parents are to buy a home,” he said.

Despite the difficulty faced by young people in buying a home, surveys show only a slight dip in the number aspiring to property ownership.

“A majority of young people still feel owning your own home is a big part of the Australian way of life,” Mr Wiltshire said.

That’s especially so in Australia where renting laws don’t encourage the long-term leases that are found in some European countries.

“We’ve generally viewed renting as a temporary thing or a last resort,” Mr Wiltshire said.

“Many people, especially with young kids, want security and renting in Australia really doesn’t offer that. Our tenancy laws are more tilted towards landlords.”

With many retirees living in large family homes, the focus of much discussion has been on how to encourage them to downsize to more modest premises and free up the bigger properties for young families.

However, the Grattan Institute believes that extra inducements to downsize are unlikely to have a great effect.

Mr Wiltshire said that studies show there are financial disincentives, such as sales tax, to swapping to a smaller property, but that isn’t the main obstacle.

“People like where they live, where they’ve grown up for a long time, they don’t want to move,” Mr Wiltshire said.

“A big factor driving up house prices is that it is very difficult to build your medium density maybe two to three-storey townhouses in established suburbs where the jobs are, the transport hubs are, the shopping is. It’s hard to build properties that people would like to downsize to.”

Mr Wiltshire did nominate one financial factor that discouraged downsizing – that the house value is not counted in the assets test to get the old age pension.

This means, depending on other income and wealth, people in multi-million dollar homes can get the pension while some in more modest dwellings can’t.

He said to change this would be a very hard thing politically to do.

However, he suggested including homes in the assets tests need not mean pensioners would have to sell their houses.

They could instead use a reverse mortgage (a loan taken out against some of the property value with interest added to the debt).

“A lot of older people want to see their home as an inheritance tool and pass it down to the younger generations, which is obviously very understandable,” Mr Wiltshire said.

“But it can mean the age pension is being used as an intergenerational transfer.

“Whereas to draw down on some of the equity of your home as you get older is possibly a fairer way to do it.”

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