Encouraging home ownership during a recession?

The proportion of dwelling purchases financed by first-home buyers has increased to the highest level since records started in 1991. Undoubtably, the State Government's First Home Owner Grant scheme and the Australian Government's First Home Owner Boost Scheme have contributed to this result. From a policy perspective, is this a positive outcome during difficult economic times, with the expectation of worse to come? There is reason to suggest that the Federal Government should not extend the boost beyond June 30.

The positive impact that the induced increase in building activity has had on economic activity needs to be balanced by concern for first home buyers who find themselves taking on more debt than they otherwise would. Consider the following graph on housing affordability from the RBA.




There are three factors that drive changes in the measure of housing affordability: home prices; household incomes and interest rates. The decline in housing affordability from the mid-1990s until the mid-2000s largely came about through an increase in house prices. The recent improvement in housing affordability in Australia has come primarily from lower interest rates.

While in the past real incomes were increasing so that households were able to devote a greater share of income to housing, the situation today is dramatically different. If the level of unemployment increases and average household disposable income falls in the months ahead, measured household affordability will decline and, unlike in the mid-1990s to the mid-2000s, this can be expected to have real implications for levels of mortgage stress and arrears. (In the past, the latter was not an issue, primarily because of relatively low levels of unemployment and growth in real incomes.) This in turn may have implications for house prices in areas dominated by first home owners.

Will a temporary downturn in economic activity have any significant impact on relatively young households' ability to pay off a home loan over the life of the loan? Possibly. Studies (see here and here) suggest that temporary macroeconomic shocks can have persistent effects. The timing a of person's entry into the labour market appears to have an impact on his or her lifetime earnings. If this year's first home buyers are also new entrants into the labour market, the Federal government is encouraging households to take on debt precisely when their capacity to repay debt is diminished.