The Reserve Bank of Australia’s submission to the Parliamentary Inquiry into Home Ownership is a bit like reading the bible – there is something in it for everybody. Each vested interest in the housing debate can pick and choose quotes that support their particular case.

Having read through the submission, however, I’ll share with you what I consider the most salient points. 

To my mind, Australia's housing problems are not as great as some assume. As the RBA notes, overall home ownership rates are not seriously out of line with international trends. 

What’s more, the overall level of taxation support given to housing also does not seem especially generous. While we provide more support to smaller landlords (though generous capital gains and negative gearing provisions), we don’t allow home owner mortgage payments as a tax deduction (as in the United States), and unlike in New Zealand, we don’t exempt from tax the capital gains from the sale of investment properties held for a long time.

Perhaps somewhat surprisingly in light of the hysteria over rising house prices and the role of investors, the overall level of home ownership has been broadly steady in recent years. This, however, reflects the confluence of two divergent trends: ownership rates among younger people have declined, but this has been offset by the fact more of us are older and more likely to own our own home.  In short, that suggests there’s been little net increase in demand for rental properties.

As for the decline in home ownership rates among younger households, moreover, contrary to population myth it not clear this necessarily reflects poorer affordability.

While house prices relative to income have increased – increasing apparent deposit burdens – this has been largely offset by required deposit levels declining in recent years from around 20% of the homes purchase price to as little as 5%. It’s also noteworthy that the decline in home ownership rates among younger households started in the early 1980s – well before the sharp rise in house prices to income from the mid-1990s brought by the structural decline in inflation and interest rates and deregulation of lending.

The RBA likely considers social change as a more important driver of declining home ownership rates among the young – namely a return to the higher average age of marriage that prevailed prior to World War II, and the increase in single person households in part due to higher divorce rates.

So where is the problem? Although not noted by the RBA, by international standards house prices do seem relatively high in Australia compared to several peer economies. 

But this seems to reflect patterns in which we seek to live.

As the RBA notes, “Australia is highly urbanised and its urban population is unusually concentrated in a few large cities. The population densities of these cities are also quite low relative to those of cities with similar population sizes in comparable countries.”

In other words, we tend to want to live crowded up close to each other and, despite this, we still insist on having a relatively large land component in the properties in which we live. That means a large element of our higher house prices reflects a greater land premium that in other countries. 

This also means that for the few who would prefer to live outside of our major cities the relatively fixed cost of providing infrastructure (such transport and utilities) is fairly higher per person – which in turn limits supply and hurts affordability. 

Indeed, these forces seem to self-reinforce. As the cost of living far from cities is not especially cheap and very inconvenient, it adds to the demand for more expensive urban properties. This in turn limits the supply of would-be regional inhabitants that could otherwise defray the average per capita cost of providing them the necessary infrastructure. It’s a catch-22.

To the extent that high house prices relative to income is considered a problem, the single best solution would seem coordinated government efforts to promote greater decentralisation in economic activity and housing. And if we don’t want to do that, we could reduce cost of urban homes by increasing density (ie. more high rise development – which would antagonise many existing home owners).

It’s as simple as that.

Meanwhile, all of the discussion regarding house prices, taxation and investors seems a red herring. Indeed, in line with my own research published on Switzer Daily recently, an RBA chart shows most of the recent rise in Sydney house prices reflects catch-up from years of underperformance.

Meanwhile, while the share of households that rent privately has increased in recent years, this largely offsets the decline in public housing – and, as noted above, has not come at the expense of declining home ownership. In fact, we might be thankful that we’ve been generous to little landlords, as they’ve filled the supply by government increasing neglect of public housing.