Transitions into home ownership: a quantitative assessment

Abstract

• Measuring housing affordability for first homebuyers is challenging, as a range of variables affect the cost of housing services. Exogenous factors such as market prices and interest rates play a key role in determining the ‘affordability’ of housing, and buyers also make choices that impact on the cost of housing services. • Housing has become less affordable over time. As one of the largest single transactions—if not the largest—that households enter into over the life cycle, there are specific challenges around financing the purchase of a dwelling because of credit-market constraints. • One constraint faced by households wanting to enter into home ownership is the need to accumulate savings towards a deposit or downpayment. Increases in house prices relative to income have lengthened the time required to accumulate a ‘typical deposit’ in markets such as Sydney and Melbourne, and it is now over six years. • Successive cohorts of Australians have experienced lower rates of home ownership at any given age. Home ownership rates at age 30 have fallen from a high of 65 per cent among those born in the late 1950s to around 45 per cent among those born in the 1980s. By age 50 there is incomplete catch-up in home ownership rates—which means that younger cohorts do not close the gap and catch up with their older counterparts. Around 25 per cent of the home ownership gap remains. • Parental direct and in-kind transfers are associated with more rapid transition into first-time home ownership. Relative to renters, an extra year co-residing in the parental home is associated with an increase of approximately 40 per cent in the likelihood of transitioning into home ownership. • Bequests and parental transfers are more likely to flow to homeowning individuals. The net effect of such transfers is to increase wealth inequality over time.