Research shows the high cost of housing is making it more difficult for Australians to climb out of poverty.
Almost 30 per cent of Australian homeowners are mortgage free. No repayments to budget for, no interest rates to worry about, no anxiety about housing security in retirement.
The financial benefit to those homeowners is clear, but what about the non-monetary benefits? And what’s the flow-on effect to their families?
Any Sydneysider with an eye on the property market – and who may have been the loser at an auction – understands the value of the bank of mum and dad.
Now, those intergenerational transactions are the subject of an income mobility research project, analysing data from Australia, the US and Germany.
Research author Sergey Alexeev, from the University of Technology Sydney (UTS), has for the first time included the non-monetary benefits of homeownership in tracking income mobility between generations.
“It’s hard to argue Australia is the land of a fair go, because some get a significant leg up on the ladder of opportunity simply because their parents or grandparents were homeowners,” says Dr Alexeev.
“There is no doubt that home ownership in Australia, while bringing significant benefits to those owners, helps to maintain wealth down the generations.”
House prices in terms of income have almost quadrupled in the past 20 years in Sydney and Melbourne, making the Australian dream of homeownership an impossibility for younger generations.
Dr Sergey Alexeev
Dr Alexeev says “intergenerational income mobility” provides an indication of equality of opportunity in society.
Using data from Australia, the US and Germany, the research showed a 22 per cent reduction in intergenerational income mobility in Australia when the benefits of home ownership were included in the analysis, but no impact for the US or Germany.
This suggests the high cost of housing is trapping many Australians on the lower rungs of the economic ladder, making it more difficult to climb out of poverty.
“Measures of income mobility in a country are usually based on disposable income because this income is easier to track. The problem with this approach is that there are other in-kind components of income that also influence economic wellbeing,” says Dr Alexeev.
“If you live in your own home, it is not only a financial asset, but also a source of services that influence your standard of living by providing safety and security, and access to shops, transport and work.
“Those who don’t own a home have to pay rent to access the same benefits. So to accurately measure mobility in a society it is important to consider this ‘imputed rent’ as a hypothetical income for homeowners,” he says.
Relative to disposable income, the Australian share of imputed rent derived from the advantages of homeownership is almost three times larger than in the US and up to 10 times more than in Germany.
“House prices in terms of income have almost quadrupled in the past 20 years in Sydney and Melbourne, making the Australian dream of homeownership an impossibility for younger generations.
“And, as our results show, when you account for imputed rents across generations this hurts income mobility.
“Some of the house price increase is due to policies that encourage homeownership, such as the means-tested system of benefits that excludes private dwellings from those tests.
“But there are also structural reasons. In Australia, higher-paid jobs are spatially concentrated in a few locations, while the urban population density is low,” says Dr Alexeev.
The study also highlights growing inequality between generations. In Australia and the US, the ‘imputed rent’ from home ownership for the parents' generation is about twice that of the children’s generation, suggesting younger generations are locked out of home ownership.
In contrast, imputed rent from home ownership in Germany is greater for the children's generation than for the parents' generation.
“If we want a fairer society, there are lessons we can learn from the Germans,” says Dr Alexeev.
“German economic planning provides incentives to allocate high paying jobs away from city centres. But the biggest factor is that Germans view homes simply as a consumption good, ignoring the opportunities that arise from treating them as financial assets.
“This makes the German housing market extremely stable, with half of the population renting. I think it help that homeownership is not their national dream,” he says.
The study, The Role of Imputed Rents in Intergenerational Income Mobility in Three Countries, is published in the Journal of Housing Economics.