RBA Paper: First-Home Buyers Less Vulnerable Vs Pre-2007

By Sophia Rodrigues

     SYDNEY (MNI) - The rise in aggregate and individual debt ratios don't

appear to be associated with an increase in household financial vulnerability --

at least as far as first-home buyers are concerned. 

     They appear to be more financially secure than the same cohort before the

international financial crisis, according to a research paper published by the

Reserve Bank of Australia on Monday.

     The paper investigates changes since the international financial crisis for

those stepping on to the property ladder, if "generation rent" is an important

trend if those buying first homes are taking on "too much" debt and the

implications for the understanding of growing aggregate household debt.

     Fewer people are making the transition from renting to first-home purchases

compared with the period before the international financial crisis, the paper

said. But those who appear more financially secure are repaying mortgages and

reducing their debt-to-income ratios at a steady or slightly faster rate.

     "On the one hand we find that fewer people are making the transition from

renters to home owners than prior to the crisis," the paper said.

     "On the other hand those households that do make the transition are more

financially secure than earlier cohorts. So the rise in aggregate and individual

debt ratios do not appear to be associated with an increase in household

financial vulnerability -- at least as far as first-home buyers are concerned,"

the paper said.

     The study is likely to provide some comfort to the RBA which has been

worried the rise in aggregate debt-to-income ratio for Australia households to

record levels was a sign of growing financial vulnerability.

     While that vulnerability may still exist it may comfort the RBA to know

first-home buyers aren't among the most-vulnerable group.

     Despite higher debt households that took out mortgages for first-homes

post-2007 appear to be paying mortgages and reducing debt-to-income ratios at

the same rate, or slightly faster, than households who took mortgages before

2007, the study found.

     In the year after taking out a loan the reduction in the debt-to-income

ratio for first-home buyers in the post-2007 period was around 8% -- compared

with 5% for the pre-2007 cohort. This reduced further to 14% after three years

for the post-2007 group.

     Given that these recent rates of amortization are significantly higher than

those associated with required repayments or interest-rate changes over this

period it seems that these are voluntary choices rather than the consequence of

changes to required repayment schedules. 

     The median loan-to-valuation ratio of first-home buyers in the

post-financial crisis period also decreases by more than the previous cohort --

although this is likely a result of the rise in housing prices increasing the

denominator of this ratio over time, the study said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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