Research Discussion Paper – RDP 2017-05 The Property Ladder after the Financial Crisis: The First Step Is a Stretch but Those Who Make It Are Doing OK

The global financial crisis (GFC) focused attention on household debt in dramatic fashion. While Australia escaped much of the immediate fallout, concerns over the level of household debt have become more entwined in policy deliberations in recent years. 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.

This paper investigates how things have changed since the GFC for those stepping onto the property ladder. Is ‘generation rent’ an important trend? Are people buying first homes taking on ‘too much’ debt? And what implications does this have for our understanding of the growing level of aggregate household debt?

We find that fewer people are making the transition from renters to owners than prior to the crisis. 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. We attribute 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.