cut mortgageAHURI published Friday an important new research paper ‘The edges of home ownership’ about churn in the property market that deserves our close scrutiny and debate.

Wood, Ong et al compare the UK and Australian experience of those leaving and reentering home ownership using HILDA and two consecutive UK longitudinal studies.

“…across the first decade of the current millennium, the majority of households, having attained owner occupation, sustained it to the end of the study period. In the combined observations for the two countries, just one in seven (15%) dropped out, though the likelihood of this was much higher for Australia (22%), than for the UK (9%).
“An intriguing discovery is the relatively high proportion—over half—among those exiting ownership who re-enter that tenure sector before the end of the study period. The proportions are much higher in Australia (60%) than in the UK (41%), though the fact that this occurs at all in such a short time frame—contrary to most conceptualisations of housing pathways in the wider literature—suggests that ‘churning’ is a phenomenon that merits closer scrutiny.”

Indeed it does. The costs imposed on those obliged to exit, notably Stamp Duty, are staggering.

The report contains the clearest exposition of Australia’s current property pathway I have seen and merits a few moments of your time:

1.1 Context
Conventionally, in the English-speaking world at least, the edges of home ownership are crossed just once in the life course, when young households step out of parental, or rental, accommodation and onto the so-called housing ladder. Access is secured through a small equity stake (or deposit) together with the leverage of a residential mortgage. Thereafter, owner occupation provides—among other things—a way of smoothing incomes across the life course, and a tax-advantaged investment vehicle that is traditionally retained until at, or near, the end of life.

Rising prices across the millennium changed this equation slightly, making it difficult for young households, whose incomes and savings are not protected against house price appreciation, to accumulate deposits or support large enough mortgages to enter home ownership. The problem of affordability for first-time buyers took centre stage. In the credit-rich years of the early 2000s, lenders responded with a new range of ‘affordability’ products (Scanlon & Whitehead 2004). These lowered entry costs by reducing deposit requirements and deferring capital repayments, thus, arguably, building a bridge across the widening gap between renting and owning, but enlarging the edges of ownership beyond sustainable limits. Alternative ways to achieve that end included a limited range of equity finance products. But although Australia and the UK have taken the lead here, the sector is very small (Smith 2013).

A second shift in mortgage markets occurred at this time, as an array of product embellishments were introduced to encourage borrowers to add to their mortgage, in situ as well as when moving, to release funds for discretionary spending. The astonishing growth and financial effects of this ‘equity borrowing’ bonanza are documented elsewhere (Parkinson et al. 2009; Smith & Searle 2008; Smith 2012, 2013; Wood et al. 2013). The important point here is that, with the advent of the global financial crisis, steadily growing leverage together with an epidemic of equity borrowing created the conditions under which a generation of mortgagors could slip out of ownership as readily as they eased into it.

One cost of both innovations was, in short, an accumulation of unsustainable debt secured against volatile assets whose risks were poorly managed. The policy response was again swift: for home buyers, its primary manifestation in Australia and the UK was to encourage forbearance among lenders, creating a holding position for borrowers at the edges of ownership in the hope that this might act as a bridge to better times (Smith 2010).

Policies that help households attain and sustain owner occupation have, in short, been quick to recognise that the edges of ownership can be precarious, but they have consistently regarded these edges as a zone to transition to cross and then leave behind in favour of mainstream home ownership. This might have been a fair view for those years in the 20th century when owner occupation was expanding both absolutely and relative to the rental sector, and in a period when the investment returns on housing were largely rolled over as inheritance. Today, however, times have changed. There is now considerable, well-founded, alarm that a combination of demographic change (divorce and separation), leveraged purchases at high real housing prices, and precarious forms of employment have interacted with contemporary flexible housing markets to push or keep large numbers of Australian and UK households out of home ownership (Beer & Faulkner 2009). Equally, there is growing evidence that the need to mobilise housing wealth to meet pressing spending needs has forced households, both on the margins and in the mainstream, to borrow up, rather than pay down their debts, in a pattern that may not be sustainable (Ong et al. 2013; Wood et al. 2013). In our own analyses, for example, for Australia alone, counting every year between 2001 and 2010, we estimate (using the survey of Household, Income and Labour Dynamics in Australia) that 1.9 million episodes of home ownership were terminated by a move into rental housing. This was more prevalent among the under-50s than among older age groups: in fact, 23 per cent of home ownership spells in Australia among the under 50s ended, compared with 16 per cent among those 50 and over.

These patterns are striking and merit close attention. However, even more intriguing is the indication that nearly two-thirds (61%) of ex-home owners later regained ownership; and some (7%) churned in and out more than once, even within the time- limited 10-year period. In short, the evidence is that the edges of home ownership are more permeable than once thought, are crossed in both directions, and are characterised by a degree of ‘churn’ that is sufficient to warrant consideration in its own right.

This is of more than simply academic interest; indeed it raises major policy concerns. For example, high rates of exit across the life course threaten the high levels of home ownership on which Australian retirement incomes policy is based, potentially increasing demands on housing assistance programs, in particular Commonwealth Rent Assistance (CRA). It also compromises the role of housing wealth as an asset base for welfare, in settings where neither social nor individual insurance safety nets adequately meet the costs of biographical disruption and financial shocks (Wood et al. 2013). Furthermore, evidence of churning at the edges of home ownership questions the targeting of direct subsidies on first home buyers, and draws attention to the limitations of tax arrangements that concentrate housing tax subsidies on the higher income over-65 outright home owner. If this churn is about swapping the costs of owning for those of renting, it also raises questions about the range of financial instruments available to manage owner occupation in the 21st century.

This conventional wisdom worked for most of Australia’s economic history. It is not working today, with almost all First Home Buyers excluded from the market by our eye-glazing land prices.

Further, those churned out of ownership at this point of the cycle with little equity or limited working life remaining or an uncertain income stream have no chance of rejoining. Think divorce, ill health or business failure.

A bleak future renting in retirement awaits them. An equally shocking outcome is ahead for anyone buying now at these current crazy price/rent multiples. They will never get ahead.

Who is at fault?

Government that restricts access to land through zoning, a tax system that feather-beds existing long-term holders, an insane appetite for risk and an extractive bank system that has dialed up the fattest net interest margins in the western world. All need surgery, not tinkering. Get this wrong, and the boom-bust can only repeat.