Given the hullabaloo about house prices that is reaching fever pitch at the moment, I thought it useful to present some basic facts and commentary from the RBA on housing, house prices, affordability, first home owners. It is from its work on affordabiltiy at this link: 

Just to reiterate, all the words are the RBA’s – I have added some emphasis.

“It seems at least plausible that the rise in housing prices since the mid 1990s has contributed to declining home ownership rates among younger households. But the Census data suggest that the downtrend in home ownership for the 25–34 and 35–44 age groups started in the early 1980s, with much of the decline occurring by the mid 1990s, before the sharp increase in housing prices relative to income.

At first glance, this would seem to imply that housing ‘accessibility’ has declined; previous studies have found that the savings required for a deposit seems to be more important for the transition to home ownership than the ability to service a mortgage from current income thereafter (Bourassa 1995).”

“However, financial deregulation and increased competition in the mortgage market has partly offset this effect, by reducing minimum down payment (deposit) requirements. The maximum loan-to-valuation ratio (LVR) available in the Australian mortgage market has increased noticeably over recent decades, from the 80 per cent typical in the pre-deregulation period to around 95 per cent at present.

“Equivalently, the deposit required of a first home buyer is no longer necessarily around 20 per cent of the purchase price, but rather, more often in the 5–10 per cent range. This shift would have eased the accessibility constraint imposed by the deposit requirement more than would be apparent from a simple comparison of a fixed percentage of the median purchase price over time.”

“The latest data from mortgage lenders suggest that around 15 per cent of new lending to owner-occupiers involves LVRs above 90 per cent; most of these borrowers would be first home buyers.”

“The home ownership rate for typical first home buyer age groups has drifted down over several decades. The pace of decline has not increased noticeably recently, but the underlying drivers of the decline might have changed.”

“Older age groups are now less likely to own their home outright than in the past.”

“The decline in home ownership among younger households has attracted considerable attention. In general, there are many interrelated factors that can affect the home ownership rate, whether at the aggregate level or for particular age groups (Yates 2011). These include:

  • demographic and social factors, such as the distribution of the population by age or household structure
  • economic factors, such as the relative cost of renting and owning or the level and distribution of (current and expected) household income
  • institutional factors and government policies, such as the taxation of housing or the provision of public housing.”

“Demographic change has been an especially important driver. In particular, the pronounced trend towards later marriage and family formation over the past 40 years or so would be expected to have reduced ownership rates“.

A trend to later marriage is likely to have resulted in deferred home purchase among younger people. Over recent decades there has also been an increase in the prevalence of single adult households, particularly single-parent households, in part driven by significantly higher divorce rates since the 1970s. This trend is also likely to have weighed on the home ownership rate, as single adult households have a much lower tendency to own their own home.”

“Of the possible economic causes of declining home ownership rates among younger households, the most obvious would be the sharp rise in housing prices in Australia since the mid 1990s. Housing prices rose significantly, including relative to income, between the mid 1990s and mid 2000s (Graph 8). However, this mainly was driven by the structural downward shift in consumer price inflation and thus nominal interest rates. As a result, housing ‘affordability’, measured as the share of average household income required to service a loan on a median-priced dwelling, has continued to cycle between 20 and 30 per cent, and is currently well below previous peaks.”