Young Australians who bit the bullet and bought their first homes since the financial crisis - in the face of galloping prices - are more financially secure than previous generations and show fewer signs of being vulnerable to a downturn, the Reserve Bank of Australia has found.
In a potentially controversial study into what it describes as the "bittersweet" reality of home ownership, the Reserve Bank concludes that while saving a deposit "is a stretch" in today's market, for those who make the step, they are better placed to pay off their loans than prior to the crisis.
The findings challenge the oft-heard warnings that recent first-home buyers are taking on more debt than they can afford, and will be left badly exposed in a downturn. Households that manage the transition from renting to ownership - which the RBA says is becoming more difficult - end up "more financially secure than earlier cohorts" of first-home buyers.
"The rise in aggregate and individual debt ratios do not appear to be associated with an increase in household financial vulnerability – at least as far as first-home buyers are concerned."
In what is some of the first research of its kind, the central bank's economics department looked at how younger Australians take their first step onto the so-called property ladder, which it defined as the transition from renting to buying. This is often perceived as being one of the riskiest moment in a person's financial life as it involves a jump to large debt and interest burdens, they said.
The study considered changes in first-home buyer behaviour since the 2008 financial crisis, and found many appear to have become more risk averse and eager to pay down debt faster. It also challenged the idea held by many analysts that official rate hikes will have a larger impact on the economy.
Because recent cohorts of borrowers have been better placed to repay their loans and have done so, the study's authors said "any given change in interest rates may have less of an effect on consumption and activity than it did prior to the crisis."
Somewhat unsurprisingly, the analysis finds that higher house prices have been the primary reason for having "crowded out potential first-home buyers from the market" rather than any major generational attitude shift against home ownership since 2008.
"We conclude that 'generation rent' is a reflection of higher housing prices rather than a shift in preferences – households still have a similar desire to become home owners, however, fewer potential first-home buyers are actually able to enter the housing market and purchase a home than before."
Indebted first-home buyers are also better off than renter households because, even though they tend to be younger, they have a higher share of couple households, with university degrees, full-time jobs and higher incomes.
It suggests that full-time employment effectively doubles the likelihood of someone buying their first home, and the effect of being in a couple is even larger. Age and household income, by contrast, have a smaller impact on the likelihood of someone taking the plunge into home ownership.
"Overall, these findings suggest the most powerful drivers of becoming a first-home buyer appear to be life cycle-related rather than economic factors," the authors write. "People do not decide to become first-home buyers because they get a promotion, but because they get older and enter into married and de facto relationships."
While most Australians will recognise those findings, they may be surprised to learn that they have changed very little compared to before the 2008 crisis, a period marked by dramatic price increases.
"The underlying desire to become a first-home buyer has not changed since the financial crisis. However, people's ability to, or comfort with doing so, has been affected."
"It seems likely that this is related to external factors, such as investor demand and supply constraints in some cities, although we have not examined that channel here," the authors, John Simon and Tahlee Stone, wrote. "That is, people do not appear to be merely delaying the age at which they purchase their first home.
"In short, 'generation rent' appears to be an important phenomenon that is related to the rise in housing prices rather than a shift in preferences or changing demographics."
That said, the report found that accelerating house prices between 2008 and 2014 - when prices outpaced incomes - has forced first-time buyers to borrow more and save for longer to build up a deposit. First-home buyer's debt-to-income ratio was around 330% in 2014, up approximately 40% from 230% in 2001, the Reserve Bank said. The median real purchase price between 2008 and 2014 was almost $100,000 more than the price paid during the 2001 to 2007 period.
Deposits have also ballooned, by around $28,000 to almost $70,000 in the more recent period. As a share of disposable income, the deposit size increased from 52% to 75% between the two periods.
While the most recent generation of first-time buyer have taken on more debt, they appear to be paying it off far more rapidly than the pre-crisis cohort. A year after taking out a loan, for instance, the debt-to-income ratio for first-home buyers was around 8% lower, compared to 5% for the pre-2007 group.
Three years after starting repayments, the debt-to-income ratio was cut by 18% for the post-crisis group, compared to 14% for the earlier buyers.
Another finding is that post-crisis first-home buyers feel more financial secure than pre-crisis buyers, despite the higher levels of debt. Another potentially controversial finding is that first-home buyers are taking on less debt relative to their income than they otherwise would have "if the same rise in housing prices had occurred in an earlier period".
"First-home buyers appear to be behaving more conservatively than prior to the crisis.
"We also find that, if anything, first-home buyers are paying down loans more quickly and on several financial fragility measures are more secure than first-home buyers earlier in the 2000s.
"A plausible explanation for this finding is that those first-home buyers who are able to save enough to meet the higher deposit requirement imposed by higher housing prices are also households who are less likely to experience subsequent financial difficulties after taking on a loan."
The report concludes that the results "are very bittersweet".
"While the first step on the property ladder is more of a stretch than before the crisis, those who do make the step are, on average, better placed to pay off their loans than prior to the crisis."
This article was originally published by the Australian Financial Review on 11 September 2017. It represents the views of the author only and does not necessarily reflect the views of AMP.
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