home Latest News Home ownership no longer sure path to wealth – The Age

Home ownership no longer sure path to wealth – The Age

This post was originally published on this site

So, why is this the case?  Firstly, residential property, like many other investments, has benefited from strong tailwinds of structurally lower interest rates.

We are now at the point where each rate cut from the RBA is a record low. Policies designed to push rates even lower could be implemented early next year.

The rate cuts have been capitalised into ever-higher house prices and elevated levels of household debt. However, at some point this tailwind will stop – and potentially reverse – and lower rates will no longer be such a positive driver of house prices.

From an economic perspective, it would be beneficial if a period of rising rates were to occur, as it would reflect improved conditions, but it would certainly limit house-price growth.

In an environment of no further declines in interest rates, the key economic driver of future house price increases would be household income growth alone. This would usher in a new paradigm that saw more limited growth and increased cyclicality in prices.

Loading

Other key medium to long-term drivers of house-price appreciation have been population growth and workforce composition. On the former, the counter to strong population growth is additional supply of residential units. This supply response will be important, particularly as it is consistently touted by many as a means of improving housing affordability by limiting house-price growth.

On the composition of the workforce, the large increases in the female participation rate has meant that there are now more multi-income households than ever before. This has translated into stronger income growth that has facilitated house-price hikes. The trend will likely continue but at a slower pace.

The combined effect of these factors suggests that the growth in the value of Australians’ largest asset – their houses – will, on average, be lower over coming decades.

Households’ superannuation assets seem destined to become at least as significant as houses. Data suggest this trend is already happening.

Loading

Housing currently represent just under 52 per cent of total household assets – almost unchanged since 2000 – while super has risen 7 percentage points to 24 per cent over the same period.

In addition, the outright dollar value of dwellings has expanded four-fold since 2000, while the dollar value of super has risen six times.

The trend towards super is likely to continue as house-price growth moves structurally lower and super continues to be boosted by compulsory contributions.

It is also worth noting some important distinctions between these two types of investments.

Firstly, a home purchase is a leveraged investment. Super is not.

Secondly, super is a professionally managed investment that can be adapted to suit conditions with little cost. A home purchase is relatively static and has large transaction costs.

So, the future path to a comfortable retirement – especially for the young – seems likely to become much less reliant on home ownership and more dependent on being actively engaged with super.

Alex Joiner is chief economist of IFM Investors

Most Viewed in Money

Loading