By Clancy Yeates
Home owners in our two biggest cities got a whole lot richer in the last year, at least on paper.
Although the boom has slowed, house prices in Sydney and Melbourne still ballooned by more than 12 per cent in the year to May, CoreLogic figures show. That's equal to tens of thousands of dollars in extra wealth for a typical house.
Illustration: Simon Letch
But much of that extra housing wealth is largely an illusion.
Of course, property owners feel richer when prices rise, and on paper, many of us are indeed better off as individuals. This feeling of greater wealth makes us more inclined to open the purse-strings – something that's benefited the economy in the past couple of years.
CEDA chairman Rodney Maddock says "we also need to accept that in future most people will live in apartments and will often be renting".Credit: Paul Rovere
Politicians including Treasurer Scott Morrison tend to encourage the idea that anyone who owns a house is better off when prices rise.
But smart economists have long argued that as a society, it's ridiculous to think we can all get richer simply by buying and selling homes at ever-inflating prices.
This is a lesson that is worth revisiting at a time when there are early signs the property market may be slowing after a turbo-charged run.
There is little doubt that rising prices do make many of us feel richer.
A paper published last week by the Australian Housing and Urban Research Institute underlined the powerful impact this perception can have on how we spend money.
It found that since the global financial crisis, for every $100,000 increase in property values, middle-aged home owners were likely to increase their consumption by up to $1600 a year.
This is known as a "wealth effect", where households change behaviour because they're feeling richer, thanks to gains in their paper wealth.
The wealth effect of recent years was not as pronounced as before the global financial crisis, the paper said. But even so, the feeling of greater wealth among home owners has helped to support household consumption in recent years, economists say.
It's also true that people who own a property purely for investment purposes are clearly better off when house prices rise.
But rising home prices aren't as beneficial to many owner-occupiers as they might appear to be.
Why?
Because housing is both something that we consume, and an asset.
That means it is a large source of wealth, but at the same time, we all need to pay for some amount of housing, whether it's through renting or buying. When that cost increases it means we have less to spend on other things.
In practice, exploiting the unrealised capital gain in a house that you also live in will probably involve some big trade-offs, as many readers would be aware.
Some of these trade-offs have become increasingly obvious during the more recent years of the boom.
One way to tap into that extra value is to sell the house. But of course, you'll still need somewhere to live, and comparable properties will have become just as expensive.
In other words, you'll have to trade down in some way to end up ahead financially. That's not always easy to do in a city like Sydney.
Another way to access the wealth is by taking out a loan against your house.
But Reserve Bank governor Philip Lowe last month suggested households were "much less inclined" to withdraw equity from their homes today, perhaps because of their already sizeable debt loads.
"Many of us feel that we have enough debt and don't want to increase consumption using borrowed money," Lowe said.
The last few years have also demonstrated just how powerful property booms are in redistributing wealth in favour of those who already own property.
As many baby boomers are finding out, one of the simplest ways they can help their adult kids counter this trend is through the "bank of mum and dad" – tapping into their own superannuation or housing wealth to help their children afford a home.
National Australia Bank and Westpac last year confirmed loans guaranteed by family members were growing more quickly than the broader home loan market, while this February the RBA said the proportion of first home buyers who received a loan from family or friends has climbed higher in recent decades, to more than 10 per cent.
This trend is only likely to continue, and it has consequences for the parents' wealth, too.
As Lowe pointed out in a speech last year, if more parents choose to pass on their wealth to help their kids into the housing market, that leaves less wealth for the parents to spend on themselves.
While the bank of mum and dad may seem like a modern phenomenon, we've been talking about these issues for more than two decades.
In 1995, a future Reserve Bank governor named Ian Macfarlane pointed out the illusion of higher housing wealth.
"The enhanced wealth is in a form which is unlikely to be realised – how many of us sell our house and live in something of lower quality in order to 'cash in' the higher wealth for use in some other form of expenditure?
"Moreover, while periods of strong increase in house prices make the present owners of housing richer, they also make those next in the queue poorer," he was later quoted as saying.
Twenty-two years later, after quite a few more booms, these words have only become more relevant. While property booms do make many of us richer as individuals, they don't make us wealthier as a society.
Clancy Yeates is a Fairfax journalist. Ross Gittins is on leave.