Exploring causes and consequences of today's housing market challenges

26 February 2024
The 12th annual Warren Hogan Memorial Lecture
The School of Economics hosted the 12th annual Warren Hogan Memorial Lecture on Wednesday 8 November 2023.

This year's keynote speaker was Ms Besa Deda, Chief Economist for several Westpac Group institutions, including St George Bank, Bank of Melbourne, BankSA, BT, and Westpac’s Business Bank. Besa was taught by Professor Warren Hogan while completing her Honours year in Economics.

Professor Hogan understood how important it was for academic economists to engage with their counterparts in the private and public sectors; an approach which, while more common now, was much rarer then. The current housing market issues Australia is grappling with represent precisely the kind of practical problem that would benefit from more of this kind of cross-communication between academia, industry practitioners and policymakers. Besa made a point of acknowledging one of Professor Hogan’s colleagues, the late Associate Professor Judy Yates – a housing market expert – and a mentor to many economists in Australia over the years. The School offers the Judith Yates Essay Prize in Economics, and is awarded for the best annual essay exploring the topic of unmet societal needs. 

Housing market challenges

Housing ownership rates have fallen significantly over the last 30 years.  This fall in the proportion of households without a mortgage has been particularly stark, falling from 42.5% in 1996 to under 30% in 2020, particularly affecting younger age groups, (mostly 25-34 and 35-44 year olds). It is important to note that this is before the latest significant upswing in house prices and interest rates. Mortgages take longer to get and once obtained longer to pay off.

Looking across generations, each successive birth cohort has suffered a lower rate of home ownership (whether with a mortgage or without). This deficit survives throughout the life cycle whereby subsequent generations on average do not catch up to the home ownership rates enjoyed by their predecessors. Intergenerational inequity in perpetuated.

What has driven these changes in home ownership?

  • Household income has failed to keep pace with rises in property values. The stratospheric rise in house prices has affected all households, but incomes of richer households have risen at a much faster rate than those at the lower end of the distribution.  
  • The result is that while housing has become slightly less affordable for the richest households, it has become drastically less affordable for the poorest. Australia has one of the highest levels of household debt in the world.  
  • Supply of new dwellings have not kept pace with booming migration levels.
  • Public and social housing, which in the past may have been expected to pick up some of this slack, has collapsed.  The inevitable result has been increased homelessness.

Of course, there have been numerous winners from the rise in house prices – namely, older generations who were able to buy their houses when they were more affordable and then benefited from numerous generous tax breaks associated with home ownership and property investment. As Besa notes, this has, among other things, encouraged an inefficient use of the existing housing stock; numerous dwellings either lie empty or are under-occupied.  Significant tax breaks for housing investment appear not to have addressed this problem. 

It appears, therefore, that while Australia’s housing market has created significant wealth for some, it has also created significant wealth inequality.

Written by Associate Professor Mark Melatos from the School of Economics.

Banner Hero Image: Ms Besa Deda. Murray Harris Photography

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