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The RBA just scotched a theory about younger Australians choosing to not to buy a home

David Scutt

Forget the perception that younger Australians are frivolous with their money, or that they now prefer to rent than buy.

The real thing holding Australian first time buyers back from buying a property is rapidly increasing house prices, says John Simon and Tahlee Stone, economists at the Reserve Bank of Australia (RBA).

Rather than a shift in ownership preferences or demographic changes in the years following the global financial crisis, Simon and Stone acknowledge that higher prices are largely responsible for crowding out prospective first home buyers (FHBs) from the market.

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"Our results support the hypothesis that higher housing prices have crowded out potential FHBs from the market," the pair wrote in a discussion paper released on the RBA's website today.

"We find no evidence that the observed demographic characteristics of indebted FHBs changed noticeably over the 2000s, and when we test for a level shift in household behaviour that captures increased risk aversion following the financial crisis, we find that controlling for housing prices accounts for almost all of the change in FHB ownership since 2008.

"As such, 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 FHBs are actually able to enter the housing market and purchase a home than before."

Forget the smashed avocado with crumbled feta on five-grain toasted bread at $22 a pop and more as an example of the frivolous discretionary spending habits of younger Australians that are holding the dream of home ownership back.

The real reason for declining home ownership rates, according to Simon and Stone, is the growth in house prices over the past decade.

"It seems likely that this is related to external factors, such as investor demand and supply constraints in some cities," they wrote.

"While demographic factors are important determinants of home buying, they have not been changing significantly since the financial crisis. That is, people do not appear to be merely delaying the age at which they purchase their first home."

According to Simon and Stone, the median price of FHB homes purchased between 2008 to 2014 was $387,000, almost $100,000 higher than the median price paid by FHBs in the six years to 2007.

And with prices rising quickly, that meant that the deposit required to obtain a housing loan also jumped during that period, creating an additional hurdle for anyone looking to enter the property market, especially during a period of elevated unemployment and low wage growth.

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"A consequence of higher purchase prices is that FHBs have had to save a much larger deposit despite maintaining a similar median loan-to-valuation ratio (LVR) of around 83%," Simon and Stone wrote.

"The median deposit size increased by around $28,000 to almost $70,000 in the 2008–14 period. As a share of disposable income, the deposit size increased from 52% to 75% between the two periods.

"This increase... suggests that FHBs might be facing a higher financial burden in the post-financial crisis period."

And this was data from nearly three years ago.

In the period since house prices in Australia's southeastern corner have soared on the back of lower interest rates and increased activity levels from local and foreign investors, far outstripping the increase in household incomes over the same period, primarily as a result of low wage growth.

Throw in elevated levels of unemployment and underemployment among younger Australians due to lacklustre economic growth and it means that it's become harder to save for a deposit for a large proportion of prospective first home buyers.

While several state government's have acted to improve housing affordability by introducing stamp duty concessions and increased first home owners grants, as has been seen time and time again in the post global financial crisis era, these are only short-term solutions that bring forward demand temporarily.

And given their temporary nature, one could even argue that they worsen housing affordability longer-term, pushing up prices further which makes it more difficult to save for a deposit.

It benefits those who are in a position to buy now, but may actually make it harder for those who are trying to save to purchase in the future.

There's no easy solution, especially when politics is taken into consideration.

However, stop-gap measures to improve housing affordability in the short-term could be laying the seeds for even larger socioeconomic problems for state and federal governments to deal with in the future.

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As Simon and Stone note, falling home ownership rates could exacerbate wealth inequality across Australia further.

"Given research that links the rise in inequality to changes in home ownership patterns, this could have significant longer-term consequences for the distribution of wealth in Australia," they wrote.

You can read the full discussion paper here.