Cyclical versus Structural Sustainability of Homeownership: Is Counter-cyclical Intervention in Housing Markets Enough?

Abstract

The economic and housing market difficulties that emerged as a result of the recent global financial crisis (GFC) have encouraged a focus on the cyclical sustainability of homeownership. As a result, there has been inadequate attention paid to the impact of increased real household incomes and wealth on the structural sustainability of a housing system built on homeownership as the dominant tenure. This paper argues that, where housing supply is relatively inelastic in the long run, underlying demand pressures may keep house prices on a path which continues to diverge from household incomes. This will add to borrowing constraints already faced by aspiring first homeowners with low and moderate incomes and with limited wealth. If financial institutions tighten lending standards in response to the GFC, households with limited equity and limited capacity to pay will find it even more difficult to gain access to finance than has been the case in the past. This raises the question of whether homeownership can be sustained at its current levels. The paper uses outcomes in Australia to illustrate the points made and suggests that other countries, such as the UK, may well be about to follow the same path.