The changing nature or the rent vs. buy decision and implications for the housing market

Undoubtedly the ‘great Australian dream’ for most people has been the freehold ownership of a residential dwelling. This ideal has been handed down from generation to generation, which in turn has produced substantial direct and indirect demand within the overall economy. However trends are now emerging that suggests this goal has commenced a downhill slide in importance. Rather than being careful and frugally saving their financial resources for a house deposit and then committing to long term mortgage debt, it appears that many households are choosing to remain debt-free and rent rather than buying. This frees up the cashflow for other services such as holidays and motor vehicles. This type of shift may cause many implications for a broad cross-section of society and accordingly should be identified and monitored as soon as possible. This study analyses the recent trends in home ownership versus renting in Australia. It considers a wide range of indicators that provide an insight into these changes, allowing a number of deductions to be drawn and formulating an overall picture of these trends. The effect of long-term renting on individuals/households and the overall economy are also considered. Finally, a number of recommendations that pave the way for further research in this area are forwarded. The Changing Nature of the Rent vs. Buy Decision and Implications for Housing Markets Greenhalgh & Reed – AsRES/AREUEA Joint Conference – Seoul, Korea – July 2002 2 Following a similar trend to the high profile baby boom, Australia’s level of home ownership grew rapidly in the post-war period and has since remained relatively stable at 70% over the last three decades (ABS. 1999a) – see figure 1. This can partly be attributed to a period during the 1970s where housing policy was an integral part of economic and regional development in Australia. Thus housing was used as a de facto stabilisation policy, in that public-sector building programs were often timed to sustain the building industry through the cyclical fluctuations (Wulff, 2001). Nevertheless this ideal may now be coming unstuck. For example, the new generation of households are increasingly reluctant to be tied to a mortgage, and can be better described as ‘free agents’ who like to travel, eat out and have other commitments such as loans for new cars (Ryan, 2002). Australia still maintains a relatively high level of ownership compared to other developed countries as shown in Figure 2. Figure 1 – Changing home ownership rates in Australia, 1975-97 (Source: Yates, 2000) Generally the benefits of housing ownership can be summarised as two-fold, being: (a) providing shelter for the entire household; and (b) as an investment for the owner-occupier (Hutchison, 1994). Although the need for human self-preservation and shelter in (a) remains undisputed, the returns from housing investment vary considerably between regions and also with other forms of investment that can give competitive returns e.g. equities. In contrast, the option of renting also provides basic shelter and exclusive use of the premises, therefore fulfilling many of a household’s essential needs. Substantial equity is not required, which can then be redirected in alternative investment vehicles with higher liquidity. The Changing Nature of the Rent vs. Buy Decision and Implications for Housing Markets Greenhalgh & Reed – AsRES/AREUEA Joint Conference – Seoul, Korea – July 2002 3 Figure 2 – Comparison of home ownership in developed countries (Source: European Mortgage Federation, IUHF, national statistics as cited by Anon, 2002) After the completion of their high school education most individuals are strongly encouraged to commence a saving plan to buy their own house as early as possible in their lifecycle. This has been a long-standing tradition passed down by parents, where it was considered essential to amass financial equity as soon as possible. Being frugal and staying very close to home, spending very little and sacrificing a social life have been proven means of achieving this goal. The undisputed goal was always to save enough for a deposit and commit to a mortgage for their own house, commonly referred to and promoted by the real estate industry as ‘the great Australian dream’. The level of housing affordability in Australia has decreased substantially over the last twenty years as shown in Table 1, coupled with a comparatively steady rise in house prices. A number of reasons can be attributed to these changes, including the deregulation of the banking industry in the mid-1980s and sustained low inflation. Even so there has been little explanation given as to why the house price levels for Australia, and New Zealand to a certain extent, have increased from the average to now well above international standards (Ellis & Andrews, 2001). This places tremendous pressure on the level of housing affordability for those Australian purchasers faced with a tenure 'rent vs. buy' decision. 0 10 20 30 40 50 60 70 80 90 Ireland Spain Italy Australia Britain USA Belgium Canada Japan Sweden France Netherlands Germany