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RBA: FHBs ‘crowded out of the market by higher housing prices’

First home buyers are "less likely to take on a mortgage" today than in the early 2000s, Reserve Bank economists have found, as a result of being "crowded out of the market by higher housing prices".

According to the RBA’s research discussion paper The Property Ladder after the Financial Crisis: The First Step Is a Stretch but Those Who Make It Are Doing OK, there is still an “underlying desire” to purchase property but “people’s ability to, or comfort with doing so, has been affected”.

Authors John Simon and Tahlee Stone found that, following the GFC (starting around 2007), households were 3 per cent less likely to take on household debt than their counterparts in the early 2000s (i.e., before the GFC hit).

This decline occurred across all age groups, but was most pronounced for households aged 25 to 34 years — the group that typically has the highest propensity to become ‘indebted first home buyers’ (FHBs).

Further, after running a model to control for other changes in economic conditions (such as higher unemployment and lower interest rates), the authors said that the results “suggest that higher housing prices have accounted for most of the change in the probability of FHB ownership pre and post the financial crisis period”.


However, the two authors outlined that while fewer first home buyers are taking on mortgage debt, those that do are “better placed to pay off their loans”.

This was largely attributed to the fact that the increase in housing prices, and the associated hurdle of saving for a deposit, required “financial discipline that is associated with fewer subsequent difficulties”.

“We find that potential FHBs today are less likely to take on a mortgage and purchase a home than those earlier in the 2000s,” the authors wrote.

“Our results provide evidence that FHBs are being crowded out of the market by higher housing prices.”

The authors continued: “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.”


Other findings of the report included:

  • the median FHB debt-to-income ratio was around 330 per cent in 2014, up from 230 per cent in 2001;
  • the median real purchase price of FHB homes in the 2008–14 period was $387,000 — nearly $100,000 higher than the price paid by FHBs in the 2001–07 period;
  • the proportion of FHBs with tertiary education and full-time employment have increased and household disposable incomes have risen;
  • full-time employment doubled the likelihood of someone becoming a first home buyer;
  • the median deposit size increased by around $28,000 to almost $70 000 in the 2008–14 period;
  • households who took on mortgages post-2007 appear to be paying down their mortgages and reducing their debt-to-income ratios at the same rate, or slightly faster, than households who took on a mortgage before 2007;
  • FHBs 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;
  • in the period 2011–14, around 14 per cent of FHBs received held with their loan;
  • as a share of disposable income, the deposit size increased from 52 per cent to 75 per cent between the two periods. The RBA suggests that this, coupled with a rise in the debt-servicing ratio (from 20 to 26), could mean that FHBs are facing a higher financial burden in the post–financial crisis period.

The report concluded: “The results we find in this paper are very much bittersweet. On the one hand, we find that fewer people are making the transition from renters to home owners than prior to the crisis. 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. On the other hand, those households that do make the transition are more financially secure than earlier cohorts....

“While saving a deposit is a stretch, it is also a sign of financial discipline that is associated with fewer subsequent difficulties. Thus, 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.”

[Related: Average FHB loan jumps by $4K in one month]

RBA: FHBs ‘crowded out of the market by higher housing prices’

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Annie Kane

Annie Kane is the editor of The Adviser and Mortgage Business.

As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts. 

Contact Annie at: This email address is being protected from spambots. You need JavaScript enabled to view it.

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