RDP 2017-05: The Property Ladder after the Financial Crisis: The First Step is a Stretch but Those Who Make It Are Doing OK 5. FHBs' Post-purchase Experience[23]

Having looked at the decision to purchase a home and the initial loan amount, we now look at the subsequent experience of first home buyers. How fast do they pay down their debt and has this behaviour changed since the financial crisis?

5.1 Repayment Behaviour

Using the panel dimension of the HILDA Survey, we can track the life cycle of a loan for indebted FHBs by looking at how FHBs' debt-to-income and loan-to-valuation ratios evolve after these households have taken on their first loan. We find that the debt-to-income ratio decreases considerably in the years after a mortgage is taken on. On average, FHBs reduced their debt-to-income ratio by around 25 per cent in the first five years after taking out a loan (Figure 7). Looking at the underlying data, we can see that this is mainly due to mortgage repayments amortising the debt, rather than increasing income, although income growth does contribute.

Figure 7: Indebted FHB Debt Ratios
Figure 7: Indebted FHB Debt Ratios

Sources: Authors' calculations; HILDA Survey Release 14.0

Despite higher debt levels, households who became indebted FHBs 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. In the year after taking out a loan, the reduction in the debt-to-income ratio for FHBs in the post-2007 period was around 8 per cent, compared to 5 per cent for the pre-2007 cohort. After three years, the debt-to-income ratio for FHBs in the pre- and post-2007 periods has decreased by 14 and 18 per cent, respectively. Given that these rates of amortisation 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 FHBs in the post-financial crisis period also decreases by more than for the previous cohort, although this is likely due to the rise in housing prices increasing the denominator of this ratio over time.

5.2 Actual and Perceived Levels of Risk

We next look at financial security indicators for FHBs and compare these to renters and other owner-occupiers. We find that financial satisfaction has improved for everyone, but more so for FHBs. The share of FHBs that reported being either moderately or totally satisfied with their financial situation in the 2008–14 period increased by 9 percentage points from 57 to 66 per cent; this share increased by around 4 percentage points for other indebted owner-occupiers and renter households (Figure 8). Similarly, job insecurity decreased more for FHBs than households with other types of housing tenure, from around 14 to 10 per cent in the 2008–14 period.

Figure 8: Financial Security
By housing tenure
Figure 8: Financial Security

Sources: Authors' calculations; HILDA Survey Release 14.0

Another way of assessing the financial security of FHBs is to look at a simple indicator for the realised income volatility of these households in the five years after they take on their loan. This indicator is measured as the number of subsequent years, on average, that FHBs report a disposable income that is at least 20 per cent lower than the income they received in their first year as an FHB at time t:[24]

Comparing this indicator across the pre- and post-financial crisis periods, we find that it has decreased from 0.60 to 0.55 years. While small, this decrease indicates that, on average, FHB households in the post-financial crisis period experienced fewer shocks to their disposable income in the years subsequent to taking on a loan and is consistent with the other indicators we look at.

Considering other financial vulnerability indicators that are more related to cash flow and mortgage-specific issues, we see that FHBs in the 2008–14 period are less likely to have ever reported being behind schedule on their loan, having made late mortgage repayments or asking for financial help than the previous FHB cohort (Table 5). While the financial situation appears to have also improved for the other indebted owner-occupiers, the improvement is more noticeable for FHBs. The fact that these indicators have improved more for FHBs than for other owner-occupiers suggests that we are not just capturing the effect of lower mortgage interest rates or general improvements in economic conditions. Furthermore, over the sample period average mortgage interest rates are relatively constant.

On balance, we interpret all these indicators as showing that post-crisis FHBs are more financially secure than the pre-crisis cohort. Thus, despite higher levels of debt, the combination of both compositional and preference shifts appear to have contributed to a reduction in financial fragility for FHBs.

Table 5: Financial Vulnerability Indicators
Per cent of households
  2001–07 2008–14
Loan behind schedule
Indebted FHBs 7 4
Other indebted owner-occupiers 11 11
Late mortgage repayments
Indebted FHBs 17 13
Other indebted owner-occupiers 17 15
Asked for financial help
Indebted FHBs 34 28
Other indebted owner-occupiers 22 18

Sources: Authors' calculations; HILDA Survey Release 14.0


See Byrne et al (1981) for a discussion of a common experience. [23]

There are many different ways to measure income volatility. We choose this measure as being relevant to evaluating concerns that income volatility might undermine a household's ability to repay its mortgage. A review of the methods used by other studies is provided by Dynan, Elmendorf and Sichel (2007). [24]