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by David Sharp, Founding President of the Australian Adam Smith Club (Melbourne) and author of Economic Simplicities

In most developed countries, the dominant form of housing tenure is that of owner-occupiers, as opposed to renting, or social supply. In Australia it is estimated that the home ownership rate for dwellings is 68%. Comparable rates for other developed countries include Poland 96%, Spain 90%, Italy 82%, Ireland 77%, Norway 77%, UK 69%, USA 67%, NZ 67%, France 65% and Germany 54%. This has not always been the case. Prior to WW1, home owners were a significant minority in most such countries. In the UK, for example, it is estimated that, at that time, less than 10% of dwellings were occupied by their owners, the remainder were rented or socially supplied. The great increase in home ownership rates in developed countries, to their present dominance, began post WW1. We can consider why home ownership has become so dominant, and whether, on balance, it has been a good thing.

Government support

Governments throughout the world have tended to encourage and support the concept of home ownership for their citizens as a method of creating a stable, responsible and more involved society. Moreover enabling their citizens to acquire their own bigger and better home is now perceived by many governments (and their citizens) as a fundamental and proper part of their role. This is particularly so in Australia. Governments have implemented various measures for this to occur, including targeted taxation breaks and incentives, cash grants, the setting of interest rates, a variety of legislation, regulations and rules, favourable treatment of home ownership in determining pension entitlement, and encouraging and pressuring banks and financial institutions to lend greater amounts to more people to purchase homes, by lowering loan requirements, and providing guarantees against default. Home ownership has thus become highly politicized.

Protection against inflation

The 20th century and onward was a period of steady ongoing inflation. Typically national currencies worldwide lost at least 90% of their value during the period. As a real asset, owning one’s home is seen as some protection against such loss.

Security and Prestige

The desire to possess a safe and desirable place to lay one’s head and store one’s possessions appears to be a part of human nature, Such security, on the face of it, is best achieved by owning one’s own home. Moreover the status of home-owner is indicative of such achievement, and favourably reflective on one’s abilities to do so. The idiom “Keeping up with the Joneses” suggests that a desire for prestige is also a part of human nature. As the Joneses seek to attain the prestige of being home-owners, others are driven to do so in order to emulate them.

Good and Safe Investment

One of the lures of homeownership, when faced with the question of whether to buy or to rent a residence, is the promise, beloved by estate agents, of future capital gains. A homeowner is at once both a consumer and an investor. Apart from fulfilling its primary role of providing a place to live, the purchaser, rather than a renter, of a home is attracted by the possibility of a large scale capital increase. This has been particularly so in recent times. Such trend has been accentuated by the widespread acceptance of the myth that property prices never go down.

Forced Saving

Those who desire to save but who lack, or who doubt that they have, the willpower and determination to do so, can, by locking themselves into a mortgage, in effect, force themselves to save. Such course of action, if it is to succeed, depends, of course, on the resale value of the property, at the time of such a resale, exceeding the then amount of the mortgage.

Widespread Acceptance of Social Desirability

In recent times there has developed a broad based view that universal home ownership was natural, as the mark of an equal and prosperous society. Such benevolent view lead to the abandoning or easing of many financial or other restrictions and requirements, otherwise precluding a would-be-purchaser from the purchase of a home.

Consequences of Widespread Home-Ownership

  • As owners of property, homeowners take a greater interest and are more involved in public affairs and matters that are likely to affect the value of their property.
  • Widespread home-ownership leads to a more stable society, but can also lead to a more rigid and inflexible one. Particularly in bad economic times, such as we are now experiencing, home-owners can find themselves trapped, unable to move to areas where economic circumstances are better, without suffering a significant loss on the sale of their home.
  • In good economic times, home-owners can enjoy the prosperity of the increasing value of their homes. However in bad times they can be impoverished by a struggle to pay the mortgage or otherwise maintain their home.
  • The increased politicization of home ownership has meant governments have become increasingly restricted in the economic policies that they can pursue, feeling politically obliged to try to maintain the price of housing, even if such policies otherwise harm the economy.
  • Money spent on housing is essentially money spent on consumption rather than investment. This is particularly significant for countries such as Australia, where the major banks and other financial institutions are heavily involved in lending to home owners, leaving considerably less to be lent to productive businesses, which otherwise would be expected to contribute to increasing the national wealth. This affect is exacerbated in Australia where, apart from the high rate of home-ownership, the average home is far larger and more elaborate than elsewhere. Coupled with what is widely considered to be an overpriced market, this means significant amounts of capital are locked away from productive use. This can be contrasted with countries with low home-ownership rates, such as Germany and Switzerland, which are coping better than most with the difficult times.