Not only is it increasingly difficult for Australians to fulfil their home ownership dreams, their struggle could eventually push them into an aged underclass, writes Michael Janda.

At least since the Menzies era, home ownership has been considered the great Australian dream.

But it is a dream that is fading fast for a growing number of Australians, with economic and social implications that policymakers have scarcely begun to fathom.

Bureau of Statistics figures show that in 1994-95, 71 per cent of Australians owned or were paying off their own home, while 18 per cent rented privately.

By 2011-12 home ownership had dropped to 67 per cent and private rental had risen to 25 per cent (also highlighting the steady demise of public housing for most of that period).

Not only has the proportion of renters risen, but the proportion of households who have paid off their mortgage and now own their home outright has slumped from 42 per cent in 1994-95 to 31 per cent in 2011-12.

That means home owners with a mortgage (37 per cent of households) now outnumber outright owners.

The decline in outright owners is not surprising, with the ABS capital city index showing a quadrupling of house prices between 1986 and 2005, and then increasing a further 50 per cent since then.

In this context, it surprised me that the Bureau's separate Housing Occupancy and Costs report released on Wednesday, showed no change in housing costs as a proportion of income between 1994-95 and 2011-12 either home owners with a mortgage or renters.

Households paying off mortgages, on average, still spend 18 per cent of their income on mortgage and rate payments, renters spend about 20 per cent of their income on rent.

However, these are average figures - many of the older households with a loan are now well on the way to paying it off, meaning they may have elected to reduce their repayment levels. Many also have smaller mortgages from buying when home prices were much lower.

Secondly, lower interest rates (at least 2.5 percentage points lower in 2011-12 than they were in 1994-95) mean lower repayments, partially compensating for a 124 per cent increase in the average size of mortgages.

Further, incomes have grown strongly, and two income households have become even more prolific in the period. That explains why, even though rents have risen 57 per cent more than inflation and mortgage payments 43 per cent, they are not taking up a greater proportion of the average household's income.

Subsidised investors v first home buyers

A crucial figure shows while the average owner with a mortgage paid $432 a week on housing costs, the average first home buyer within the last three years paid $470 per week for housing (and this figure is pulled down slightly by the 6 per cent of first-home buyers who purchased without a mortgage).

These generally young first home-buyers would also tend to be on lower household incomes, making a mortgage much less affordable for them than the average, and explaining why household sizes are starting to grow as young adults stay with their families longer.

Since the end of the Federal Government's first-home buyers' boost, which lured many into bringing forward their purchase plans, first-time buyers have been stuck around 15 per cent of the real estate market.

The latest round of home price rises, which is most evident in Sydney, is mostly driven by investors, now including a substantial cohort of self-managed super funds.

These investors provide the competition that prices many first-home buyers out of the market and forces them into being long-term, perhaps lifetime, private renters.

The number of these investors has ballooned from 1.3 million at the end of last century to more than 1.8 million in 2010-11, the latest year for which Tax Office statistics are available.

What has also ballooned is the subsidy these taxpayers claim from the public purse: from posting rental profits of $700 million in 1998-99, investors now claim rental losses of almost $8 billion on their income tax returns.

Through negative gearing, two-thirds of these investors ended up receiving a discount on their income tax bills because they spent more on mortgage interest and other rental expenses than they earned in rent.

Supporters of negative gearing argue that these tax subsidies help boost rental supply and keep down rents, critics (such as Saul Eslake and many other economists) say evidence of this is dubious at best.

Negative gearing allows, and the 50 per cent capital gains tax discount encourages, investors to spend more on properties compared with other types of asset.

With more than 90 per cent of this investment going into existing rather than newly built homes, the negative gearing subsidies simply pit cashed-up property investors against prospective first-home buyers for the same stock.

The inevitable result is the prices of those homes rise, and the first-home buyer generally loses out to an investor with more equity, government tax subsidies and a much greater borrowing capacity behind them.

The beginnings of a rental underclass

Thus, over time, under the current tax system, investors will continue to snap up an ever-increasing proportion of properties and more people who would like to own will be left as long-term renters.

In theory, there is nothing wrong with renting and, even with the recent falls, Australia still has a relatively high rate of home ownership compared with the rest of the world.

However, Australia's social safety net for the aged is still very much geared to the vast bulk of people being home owners who have paid off their mortgage by the time they retire.

Even with compulsory superannuation now a couple of decades old, most households' main financial asset by far is the family home.

The Bureau's housing costs report shows those who have paid off their mortgage spend an average of just $40 a week on housing, making it possible to live quite comfortably off the full pension of $366.85 per week for a single or $553.10 for a couple when your super runs out.

Contrast that situation with lifelong renters. If they rent privately they will still be paying an average of $347 per week in rent but, even with rent assistance, they get $465.70 per week for a single or $667.20 for a couple - well over half their pension goes in rent every week.

Furthermore, those who own their home have an asset that can be sold in retirement to fund quality aged care when that becomes required, a tax free pool of savings renters do not share.

Unless Australia wants to return to a situation where many retirees see out their days in poverty, it needs to look seriously about either policies to turn around the downward trend in home ownership (such as by limiting or removing negative gearing), building more social housing, or providing assistance to older Australians that better reflects the benefits they get from any assets they own, including the family home.

Ideally, all should be considered.

The alternative is a situation where an increasing number of landlords continue to expand their property portfolios at the expense of both their tenants and other taxpayers, in the process creating a growing rental underclass destined for poverty in old age.

Michael Janda is the ABC's online business reporter. View his full profile here.