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Without assistance from family and friends, the next generation may find it difficult to afford home ownership, Reserve Bank Deputy Governor Philip Lowe has told an audience at the UWA Business School.

Speaking at this week’s Shann Memorial Lecture, Dr Lowe blamed a combination of increased borrowing capacity, strong population growth and a slow supply response for Australia’s increasing house prices.

Behind the nation’s increased house prices is soaring land values – with land, as of June 2014, comprising 34 per cent of the value of Australia’s national assets.

“Ever-rising housing prices, relative to our incomes, do increase risks in the economy and are unlikely to make us better off as a nation. Rising housing prices are best matched by rising incomes,” Dr Lowe said.

“Many parents around the country look at the high housing (really land) prices and worry that their children will not be able to afford the type of property that they themselves have been able to live in, even if their children were to have the same lifetime income profile as they have had.”

The result is that more young homeowners are receiving financial support from their families.

“Over time, there has been some increase in the share of first-home buyers that are receiving loans from family and friends,” Dr Lowe said.

“Of course, if this type of intergenerational assistance does become more common, then fewer parents will be able to use the capital gains that they have benefited from to boost their own consumption.

“Instead, in effect, they will be using those capital gains to support the following generations with their higher housing costs.”

Alternatively, speculated Dr Lowe, parents may choose to use their capital gains to spend rather than assist the next generation with housing costs – and if this is the case, house prices would come under downward pressure.

Other groups to lose out from high housing costs include young homeowners with multiple children and renters. In contrast, owners of investment properties and older homeowners with no children, said Dr Lowe, would gain financial benefits.

Dr Lowe was speaking at the 54th Shann Memorial Lecture, hosted by the UWA Business School and The Economic Society of Australia (WA) . A full transcript of Dr Lowe’s oration can be found here .

Media references

Karen Della Torre (UWA Business School)                                           (+61 8) 6488 8538
Verity Chia (UWA Business School)                                                    (+61 8) 6488 1346