The global financial crisis (GFC) had an effect on home ownership across the world.
While Australia escaped much of the immediate fallout, concerns over the level of household debt have become part of the political landscape for years now.
Parallel concerns, flowing from the rapid growth in housing prices in Australia and focusing on first home buyers, have also emerged. Some are concerned that this rapid growth is shutting a generation out of the home ownership market. Others are worried that those who do manage to buy a first home are taking on inadvisable levels of debt to do so.
Welcome then to ‘Generation rent.’ This term is used to describe a new breed of young Australian households who have either been shut out of home ownership or have had to wait longer to buy their own home, hence a generation of eternal renters.
A recent discussion paper released by the Reserve Bank of Australia (RBA) observed that the rate in which households have been transitioning into home ownership is falling. This is a global trend seen in other economies and has occured despite increased mortgage opportunities through financial deregulation.
However, even though fewer first home buyers are enterting the market than before the GFC, the paper finds that those who do enter the market are paying their debts down faster.
The millenial generation, so often pegged as lazy and without a sense of responsibility are taking their mortgages very serious indeed.
In the year after taking out a loan, the reduction in the debt-to-income ratio for first home buyers post-2007 was around 8 per cent, compared to 5 per cent for first home buyer pre-2007.
After three years, the debt-to-income ratio decreases even futher. The level of change is higher even than the increases in required repayments or interest rate changes over this period, so it seems that these are voluntary choices rather than the consequence of changes to required repayment schedules.
“We find that fewer people are making the transition from renters to owners than prior to the crisis,” said the RBA. “Those that do, however, are more financially stable than earlier cohorts. Thus, ‘generation rent’ is an important trend but a consequence is that those who do step onto the property ladder are, on average, better placed to pay off their loans.”
The RBA attributes much of this change to the increase in housing prices and the associated hurdle that deposit requirements represent.
While saving a deposit is a stretch, it is also a sign of financial discipline that is associated with fewer subsequent difficulties.