Why Australia is obsessed with housing

Leading headlines across Australia is news of a property rebound. Corelogic's home price index shows home values are defying expectations, lifting a sharp 1.2% in May. 

It's the third month of national price gains, despite the fastest interest rate tightening cycle in decades. Borrowing capacities are constrained, and commentators are concerned about the fixed-rate mortgage cliff.

Yet, demand continues to outweigh supply, and FOMO - the 'fear of missing out' - is back, says Corelogic research director Tim Lawless. 

“With such a short supply of available housing stock, buyers are becoming more competitive and there’s an element of FOMO creeping into the market," Lawless says.

"Amid increased competition, auction clearance rates have trended higher, holding at 70% or above over the past three weeks. For private treaty sales, homes are selling faster and with less vendor discounting.”

Corelogic Home Price Index

Source: Corelogic

Why Australia is property 'obsessed'

Recently, a friend who only arrived in Australia about a year ago told me of his continued surprise at how much property dominates everyday conservations and media coverage here. He jokingly suggested that when babies are born in Australia, it must be compulsory for them to receive milk and the latest copy of Domain magazine (A Fairfax-owned real estate publication). He mightn’t be far wrong.

What’s behind this attachment to property? Where did it come from? Is it permanent or cyclical? And, ultimately, is it rational or not?

To get to the bottom of these questions, let’s look at the reasons why Australians rate housing so highly:

1. Housing is tangible

Undoubtedly, this is a central point to the attachment to property. Real estate is something that people can feel and see. It isn’t like owning paper certificates of stocks and bonds.

Whether people buy property to live in or rent out, they can see it every day if they wish. Yet, tangibility is something true to other types of real estate as well, so it can’t be the only factor behind the housing obsession.

2. Ownership

There is something about ownership which draws people to buy residential property. Like tangibility though, it can’t be the only factor though as Australians can own other types of real estate too.

And homeowners may own a property, but if they have enough debt, their bank can ultimately own them.

The looming fixed-rate mortgage cliff may prove a case in point, because if homeowners aren’t able refinance their loans, then their bank could foreclose on them – though it’s unlikely to happen as governments would probably step in and lend, as former RBA Governor Ian Macfarlane recently suggested.

3. Tax breaks

Tax breaks for property undoubtedly increase the attraction of the asset class. Governments of all persuasions love to help people to buy a house. The two main tax breaks are:

• Capital gains discounts. Family homes are exempt from any capital gains tax (CGT). Investment resident property owned for more than a year get a 50% discount on CGT.
• Negative gearing. When the cost of owning a rental property outweighs the income it generates each year, it creates a taxable loss, which can normally be offset against other income to provide tax savings.

A family home is also excluded from asset eligibility tests for age pension and other social security pensions.

The chart below from the Grattan Institute shows the tax advantages of owning a home.

4. The alternative is renting

Who hasn’t heard a rental horror story? It’s no surprise that many people don’t like renting.

They may not like the uncertainty created by tenancy expiry and the possibility of having to move elsewhere. There’s also the current issue of skyrocketing rents given low rental vacancy rates and a significant undersupply of rental property. Finally, there’s the argument that money is better spent paying down interest and a loan, than paying rent to a landlord.

I’ve always found the last argument a strange one – surely it depends on the terms and quantum of the loan, and a person’s ability to pay it back in the long-term?

5. Immediate rewards

This relates back to property being tangible. When you buy a property, you get the immediate reward of living in it. When purchasing other assets, the rewards are often deferred.

For instance, if you purchase a stock, the dividends and capital gain normally take some time to accrue.

In other words, housing satisfies a psychological need for immediate gratification, rather than waiting for the reward (delayed gratification).

The irony is that many psychological studies, starting with the famous Marshmellow test in 1972, detail the power of delayed gratification. They suggest that people who can delay gratification have more success in life, on a range of measures.

Perhaps housing has both immediate and delayed gratification benefits, the latter from owning a home in the long-term and potentially reaping the rewards from that.

6. House prices 'always go up'

Undoubtedly, financial returns are a key reason behind Australia’s love affair with property. Most Australians have never seen a severe, long-term downturn in housing. And some extrapolate from their experience to suggest that such as downturn can never happen.

The belief in ever rising house prices is understandable given recent history. Over the past 50 years, residential property has performed superbly, with short-lived downticks, due to surging migration, limited supply, tax incentives, increasing city density, reduced people per household, and relatively low interest rates.

Yet if you look over a longer period, it shows that the residential property market is a story of boom and bust. In the 1980s, prices in key capital cities fell by more than 20%. Further back, Melbourne house prices declined 51% in real terms (prices minus inflation) during the 1890s property bust. And real housing prices nationally were flat for 60 years until 1950.

History suggests prices can go up and own.

7. Status

Will Storr in his book, The Status Game, argues that human beings have an irrepressible craving for status that defines who they are. He points to scientific research that shows how status affects happiness, wellbeing, and physical health. And that without sufficient status, people become more ill, and live shorter lives. Storr thinks the status game has had good and bad consequences: it’s led to advances in the arts and innovation but also wars and genocides.

Is the desire of Australians to own property really a desire to attain sufficient status? It may play a part.

8. Simplicity

There is a simplicity to understanding housing compared to other asset classes. For example, stocks and the businesses underlying them, aren’t always easy to understand. The same goes for bonds.

A justified obsession?

Housing has many advantages over other asset classes. Despite periodic setbacks, residential property in large cities has proven to be a sound long-term investment. It should remain so, given high population growth, tax benefits, supply constraints, and favourable demographics.

Whether we should be obsessed about housing is another matter.

^{Correction: An earlier version incorrectly stated family homes must be held for 12 months to be exempt from  capital gains tax (CGT). This has been updated to reflect that CGT for housing only applies to investment properties.}