A current trend towards renting in favour of home ownership could alter Australia’s distribution of net wealth if it becomes sustained long-term. To make sense of the trend and consider its possible effects, an assessment of long-term rental patterns is essential.
Whilst the current trend towards renting is irrefutable, the more important questions are why is it happening, will it be sustained long term, and what are the implications of a permanent shift? Census, REIA and ABS statistics clearly show a decline in rental trends since records began in 1947 from 44% of households to 28.7% in 1996.
The rental population has remained relatively constant since 1961, hovering between 25.7% and 28.7%.
In the wake of the city fringe industrial revitalisation taking place in many Australian cities, significant numbers of Australians are placing an unprecedented demand on inner urban housing. Census statistics reveal that it is primarily those under 30 taking advantage of these urban renewal areas, contrary to the popular belief that it is chiefly ‘empty nesters.’
The Australian experience appears to mirror similar trends in other major international cities. One only has to look at Paris and New York to identify the established pattern of city living currently gathering momentum in Australia. Why is it then that this migration seems to be associated with an increased demand on rental accommodation in particular?
Those who are relocating and taking up this rental accommodation are doing so for the following reasons:
- Renting in new complexes or inner suburban developments is currently more affordable than buying, particularly in the light of rising interest rates and a tightened credit environment.
- The established inner suburban property market tends to be tightly held and the rate at which new developments are being approved remains insufficient to meet demand.
- Inner urban relocatees will frequently rent for a year or two before purchasing, to ascertain whether their new lifestyle suits them – ‘empty nesters’.
- Some are renting so that disposable incomes can be invested in assets, which are tax effective compared with an owner occupied residence.
- Significant numbers are opting to delay marriage and families. Renting provides this group with greater lifestyle choices and flexibility.
It is probably significant that rental figures appear to have some relationship with construction patterns and related legislation. The last construction boom occurred in the mid 1960s to early 1970s following changes in ownership of flats from Company Share to Stratum title in 1960, and then Strata title ownership in 1967.
Until then, conventional home loans were not available to would be purchasers since they did not have a freehold title to offer as bank security. It remains the case today that most Australian banks remain reluctant to provide finance for the purchase of the country’s relatively small stock of Company Title apartments.
This change made affordable inner suburban living a reality, fuelling demand from many young people wanting to leave home and rent with ‘flatmates’ during their university and early working years. Unit construction went ahead in leaps and bounds.
In 1971 rentals accounted for 27.9% of households, up from 26.7% in 1966. Then, as with now, legislation, effective town planning, land releases, zoning, and structural barriers, all exerted a similar influence. Technological development and its effect on work patterns, career expectations, marriage and child bearing patterns, is engendering new lifestyles.
However, long term statistics show that the percentage of rental households has never exceeded the 30% benchmark of the late 1950’s and early 1960’s, notwithstanding severe recessions, legislative changes, demographic shifts and construction booms. The ‘highs’ have always moderated, as other variables have levelled out.
City renewal, increased construction and availability of rental accommodation would therefore appear part of a predictable cyclical pattern to which all cities are subject. As those in the current under 30s age group become more affluent, establish careers and form relationships, it is likely that home ownership will follow, albeit later in their lives than previous generations.
Many recent reports on long term viability of home ownership assume that people make one dimensional decisions regarding home ownership, and fail to consider basic elements of human nature. The drive to ‘set down roots’ is a powerful one, irrespective of lifestyle fashions, fluctuations in home affordability or advice on what may be technically correct in an investment sense.
Whilst not all homes technically represent a superb investment, home ownership is a form of enforced saving that creates a financial discipline, allowing the owner to release equity for wealth creation later on. Renting for an extended period and investing in prime assets including inner suburban investment property could well expedite home affordability, given the tax advantages and rental income.
The reality is that human beings have culturally and biologically ingrained needs. These powerful catalysts motivate us to achieve our financial and personal goals. It is unlikely that wealth creation will ever become the exclusive motivation for home ownership.
If however, the rental pattern does revert to post war levels due to severe financial hardship, we risk the bulk of material wealth being held by fewer people, or a society more European in style, where long-term rental is a more common expectation, or, mortgage products where the principal is never repaid (just the interest) enable people to live in houses that they believe they could never afford to own.
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