Pop goes the housing bubble!

The house price bubble has finally burst. While it lasted, the boom added substantially to the wealth of existing home owners, but it has made home ownership more expensive for aspiring new buyers.

In its aftermath, three questions arise. First, who financed the capital gains that home owners have enjoyed? Second, has home ownership become unaffordable for the younger generation? And third, what, if anything, should the Government be doing to help young families get on to the home ownership ladder?

Around two-thirds of households own their own home, either outright or on mortgage. For most Australians, the doubling of house prices had a major impact on personal wealth holdings.

It is sometimes argued that capital gains from the housing market do not represent real increases in personal wealth because owners cannot get their hands on the money, and even if they sell, the cash has immediately to be reinvested in another property which has inflated at the same rate. But capital gains create real wealth differences, irrespective of whether they are liquified.

One of the key sociological developments of our time has been the emergence of a division between a majority of families who are accumulating wealth through home ownership and a marginalised minority who have few assets, little material stake in their society, and no realistic prospect of accumulating wealth or passing it on to their children.

The growth of personal wealth through the housing market has many positive effects. It means families can reduce their reliance on government and strengthen their financial and personal security. They can help their children and grandchildren get a decent start in life, they can use their assets to start up businesses or as collateral for loans, and they derive pride of ownership and an enhanced sense of personal achievement and autonomy from having a home of their own.

But the sorts of capital gains we have seen in recent years also have a downside. Rapidly rising house prices make it more difficult for non-owners to get a foothold on the property ladder. And new buyers who have bought a home may have over-stretched themselves, for debt levels are at record heights and a future rise in interest rates could generate severe hardship.

Rapid house-price inflation also has wider economic costs, for it can distort the way we use capital. Young workers rush to take out huge mortgages before house prices spiral out of reach, and older buyers are seduced into investing in rental property while disregarding falling rental returns.

Just as damaging in the long term are the sociological effects of high house-price inflation. When passive ownership of a house delivers riches far beyond what most people could accumulate from many years of working and saving, traditional virtues emphasising hard work, saving, enterprise and deferred gratification are likely to get eroded. Yet these are values on which capitalist liberal democracy ultimately depends. The latest housing boom has left new and recent buyers stretched and vulnerable.

There is not a lot that government can do about this, for the key factors in the boom have been the shift to low interest rates and changing demographics, and both of these are beyond the control of our politicians. But governments have had some influence on house prices as a result of tax, spending and regulatory activities, and there is a strong case for reviewing policies in these areas.

The argument for abolishing the First Home Owner Grant seems compelling. There is also a pressing need to increase the release of new development land, and to change the system for financing new infrastructure. Tax changes, too, are warranted. In particular, negative gearing could be ended in return for a radical reduction in marginal income tax rates and a long-overdue simplification of the personal tax system.

Capital gains arising from home ownership are a major vehicle of wealth accumulation for ordinary people, but they should not be underpinned by governments at the expense of those still trying to gain owner-occupation.