Long-Run Trends in Victorian Housing Affordability and First Transition into Homeownership

Abstract

The recent house price cycle has highlighted concerns about housing affordability. But is the recent deterioration in housing affordability a short-term problem, or is it a continuation of long-term trends? We take advantage of customised data tables from the Australian Bureau of Statistics Census of Population and Housing to address this question. We focus on the state of Victoria, Australia, by comparing housing affordability and tenure share trends from 1981 to 2001, a period which encompasses two house price booms. Specifically, we look at households by income quintiles and age group in Victoria. We find that housing affordability has deteriorated, particularly for those in the lowest two income quintiles. Most importantly, deterioration is not restricted to one inter-census period. It is a trend that is evident through most inter-census periods from 1981 to 2001. Furthermore, we find that among younger households, those under 35 years of age, the share of home purchasers and outright owners is in long-run decline. The long-run trends in housing affordability pose a serious threat to the homeownership aspirations of younger Victorians.

Keywords:

• Housing affordability
• long-run trends

Notes

 1. The research for this article was commissioned by the Department of Premier and Cabinet, Victorian State Government as part of the “Analysis and Development of Indicators and Data Sets for the Housing Affordability for Low Income Victorians” project. The authors wish to acknowledge the assistance of Alan Gray in obtaining the census data that is used in this study. An earlier version of this article was presented at the National Cities Conference, Brisbane, 30 November–2 December 2005.

 2. In recent years the spiralling house prices associated with deteriorating housing affordability have raised concerns about macroeconomic consequences (Reserve Bank of Australia, 2003).

 3. The house price data is self-reported estimates from homeowners surveyed in successive Australian Bureau of Statistics' Surveys of Income and Housing Costs. We are grateful to Rachel Ong for computing these ratios.

 4. From January 2006 the First Home Bonus was reduced to $3000, and will be available until 30 June 2007. To be eligible for this payment, the house purchase price must not exceed $500 000.

 5. The First Home Owner Grant was introduced by the Commonwealth Government on 1 July 2000 as a means to cushion the impact of the GST on home purchasers. To be eligible for both the FHOG and the FHB the applicant/s must not have previously owned a property.

 6. We are grateful to Terry Burke for alerting us to this data.

 7. The table below lists the population numbers of all Victorians in private and public rental. The figures show an increase in both rental tenures between 1981 and 2001.

 8. The trends are largely unaffected by the omission of public renters (see Figures 3 and 5 in Wood & Stoakes, 2005).

 9. Home purchasers include homeowners with a mortgage but exclude outright homeowners. In the Census housing costs of home purchasers include mortgage interest payments and principal repayments on mortgages. This is a narrower definition than that typically employed when using alternative data sources (see Karmel & Wang, 1998, table 1, p. 132).

10. This assumes that most households in this age cohort continue to have as strong a preference for homeownership as those revealed by the housing choices of earlier generations.

11. The surprising rise in the share of outright owners could reflect trends in bequests and gifts from parents or other close relatives.

12. The Commonwealth additional grant was available from 9 March until 31 December 2001. The terms and conditions of the grant were revised in October 2001, and was reduced to $3000 from 1 January until 31 June 2002. From 1 July 2002, first home buyers can only access a grant of $7000. The Victorian State Government introduced a $5000 first homeowner bonus in its 2004 budget, but for many first home buyers the benefit will have been largely nullified by the contemporaneous removal of stamp duty exemptions.

13. See table 3 in Wood and Stoakes (2005) for details on Victorian applications for first homeowner grants.

14. These conclusions are subject to qualifications. In particular, Guest (2004) has shown that households first entering homeownership later in their lives will ceteris paribus demand more housing, and may therefore spend less and save more than if they entered at a younger age when demand for housing is smaller.

15. The early signs of such a downturn can be discerned. Though actual homeownership rates in Victoria increased from 73 to 75 per cent of households in the timeframe 1981–2001, the age weighted homeownership rate falls marginally by one percentage point to 72 per cent. The age weighted homeownership rate has been computed holding constant the age distribution of the Victorian population at 1981 values.