RDP 2017-05: The Property Ladder after the Financial Crisis: The First Step is a Stretch but Those Who Make It Are Doing OK 3. ‘Generation Rent’ and the First Step on the Property Ladder

‘Generation rent’ is a tag that is often used in media discussion about the cohort of young Australian households who have either been shut out of home ownership or have had to wait longer to buy their own home (e.g. Duke 2016). A number of theories have been advanced to explain this phenomenon. One is that higher housing prices have shut a significant segment of young Australians out of the home ownership market. Others are that increased risk aversion or changing demographics since the financial crisis have led to households being less willing to take on debt. Importantly, whichever explanation is true, it has implications for our understanding of aggregate debt levels. This section examines how the probability of becoming an indebted FHB and the characteristics of realised FHBs have changed over time in Australia. A detailed explanation of how indebted FHBs are identified in the HILDA Survey is provided in Appendix A.

We test three different hypotheses for what has been driving decreased FHB participation in the housing market in recent years:[10]

  1. A shift in preferences: FHBs have become less comfortable with taking on debt and entering the market since the financial crisis due to increased economic uncertainty and risk aversion. There may also have been a change in preferences over owning versus renting.
  2. Higher housing prices: FHBs have been priced out of the market; likely due to increased demand from existing owners and investors although we do not specifically test that in this paper.
  3. Demographic change: households have delayed becoming FHBs as life-cycle events, such as entering into a couple relationship and having children, are occurring later in life.

Using regression analysis we assess the relative importance of these different factors on the decision to become an indebted FHB. Our results support the hypothesis that higher housing prices have crowded out potential FHBs from the market. We find no evidence that the observed demographic characteristics of indebted FHBs changed noticeably over the 2000s, and when we test for a level shift in household behaviour that captures increased risk aversion following the financial crisis, we find that controlling for housing prices accounts for almost all of the change in FHB ownership since 2008. As such, we conclude that ‘generation rent’ is a reflection of higher housing prices rather than a shift in preferences – households still have a similar desire to become home owners, however, fewer potential FHBs are actually able to enter the housing market and purchase a home than before.

3.1 Who are FHBs and How Have They Been Changing?

FHBs make up approximately 1 to 2 per cent of households in any given year (Figure 2). The pool from which they are drawn, however, is smaller than the set of all households. It is the pool of ‘potential FHBs’ who are renters who have never owned a home before.[11] FHBs are around 5 per cent of all potential FHB households.

Figure 2: Indebted FHB Households
Figure 2: Indebted FHB Households

Note: (a) Potential FHB households are defined as all renter households who are under the age of 60 years and have never owned a property

Sources: Authors' calculations; HILDA Survey Release 14.0

As can be seen in Figure 2, the share of indebted FHBs has been decreasing since the early 2000s (apart from the sharp increase between 2008 and 2009, which was most likely due to a temporary boost in FHB incentives during the financial crisis[12]). Overall, the proportion of indebted FHBs is lower than prior to the financial crisis. This decline has occurred across all age groups, but has been most pronounced for households aged 25 to 34 years – the group that typically has the highest propensity to become an indebted FHB (Figure 3).

Figure 3: Indebted FHB Households
Share of potential FHB households, by age group
Figure 3: Indebted FHB Households

Note: Potential FHB households are defined as all renter households who are under the age of 60 years and have never owned a property

Sources: Authors' calculations; HILDA Survey Release 14.0

Comparing indebted FHB households to the pool of potential FHBs shows that indebted FHBs are economically better off relative to this group of renter households (Table 1). While they tend to be younger, a higher share of indebted FHBs are in couple households, with tertiary education, full-time employment and have higher incomes. Further, we see that this relative pattern does not appear to have changed over time.

The only substantial changes we see for indebted FHBs between the two periods are that both the proportion of FHBs with tertiary education and full-time employment have increased, and real household disposable incomes have risen. These changes are, however, common to both FHB and potential FHB households, and the population more generally. Most Australian households benefited from strong income growth and improved access to education during the 2000s. This relative stability is also reflected in the steady share of FHBs in the top two quintiles of the income distribution.

The fact that the difference between indebted FHBs and potential FHBs has not changed much over the two periods suggests that the decline in FHBs is likely due to external factors rather than due to a change in demographic or risk preferences since the financial crisis. But to test this properly we will have to look at econometric results that allow us to control for multiple factors.

Table 1: Demographic Characteristics of Indebted and Potential FHB Households
  Indebted FHBs Potential FHBs
2001–07 2008–14 2001–07 2008–14
Median age (years) 30 30 37 36
Couple household (%) 74 70 36 42
Tertiary education (%) 42 50 22 28
Full-time employee (%) 84 90 43 51
Major urban area (%) 68 68 72 71
Median real household disposable income ($)(a) 77,000 92,000 42,000 54,000
Share in top two disposable income quintiles (%) 59 57 23 24
Observations 572 630 7,745 11,752
Notes: Potential FHBs include only renter households who are under the age of 60 years and have never owned a property
(a) Reported in September 2014 dollars

Sources: Authors' calculations; HILDA Survey Release 14.0

3.2 What Explains the Decision to Become an FHB?

We use regression analysis to understand how the decision to become an indebted FHB household has changed over time. This will also allow us to identify if there has been any change in household behaviour that might be attributed to unobserved risk aversion or preferences.

We specify a probit model of the form:[13]

where the dependent variable FHBit is binary and equal to one if household i took out a mortgage to purchase their first home between survey years t − 1 and t.[14] Φ is the standard normal cumulative distribution function. The term Dit is a post-2007 dummy equal to one if the year household i became an FHB is greater than 2007. This variable is added to test for any change in household behaviour since the financial crisis. The vector of controls Xit includes household (age and age squared, household disposable income, couple household, household size, education, migrant status, employment status and unemployment expectations) and aggregate (state housing price index, state first home buyer government incentives, variable mortgage rates, urban area and state fixed effects) variables.

Results from estimating three versions of Equation (1) are reported in Table 2.[15] Model 1 – which includes the post-2007 dummy and household variables only – indicates that households in the post-2007 period are around 3 percentage points less likely to become an indebted FHB than households early in the 2000s.

Table 2: Determinants of Being an Indebted FHB Household Average marginal effects, percentage points
  Model 1 Model 2 Model 3
Post-2007 dummy −3.17*** −0.01 0.00
Age 1.01*** 1.00*** 1.00***
Age squared −0.02*** −0.02*** −0.02***
Household disposable income ($'000) 0.03*** 0.03*** 0.03***
Couple household 6.88*** 6.95*** 6.88***
Household size −1.29*** −1.29*** −1.38***
Tertiary education 2.80*** 2.80*** 3.52***
Migrant household −1.13*** −1.25 −0.68
Full-time employee 4.79*** 4.78*** 4.83***
Unemployment expectations (> 50%) −3.31*** −3.31*** −3.47***
State housing price index (log) na −0.07*** −0.08***
First home buyer incentives ($'000) na 0.08*** 0.12***
Variable mortgage rate na na 0.04
Major urban area na na −2.34***
State fixed effects No No Yes
Observations 20,699 20,699 20,699
Pseudo R-squared 0.18 0.20 0.21

Notes: Average marginal effects are calculated for each household based on the observed values of the explanatory variables for that household and are then averaged across all households; *, ** and *** indicate statistical significance at the 10, 5 and 1 per cent levels, respectively; the combined marginal effect of age and age squared are shown in Figure 4 as it is not possible to interpret the magnitude of these effects in isolation

Sources: APM; Authors' calculations; HILDA Survey Release 14.0; RBA

Although this model identifies that there has been a change in the probability of becoming an indebted FHB, it does not allow us to examine the drivers of this change – a change in preferences, an increase in housing prices or a change in demographic factors.

To explore the relative role of these drivers, we re-estimate Equation (1) and include the state housing price index and first home buyer incentives in Model 2.[16] These variables are added as a way of separating some exogenous preference change from factors related to the generally higher housing prices experienced in recent years. Once we include these variables we find that the post-2007 dummy is no longer significant and that the other household-level effects remain stable.

When we add the remaining aggregate variables in Model 3 to control for other changes in economic conditions between the two periods (such as higher unemployment and lower interest rates), we find largely similar results to Model 2. These results suggest that higher housing prices have accounted for most of the change in the probability of FHB ownership pre and post the financial crisis period. If there had been a shift in preferences or a change in the relationship between demographic factors and FHBs over the periods this should show up in a significant post-2007 dummy variable. Notwithstanding this, we also run the model with interactions between the main demographic variables and the post-2007 dummy and do not detect any significant difference in the coefficients between periods.[17]

3.3 Analysis and Discussion

In this section we consider the economic significance of the variables identified as being statistically significant in Table 2 and what this tells us about the factors affecting FHBs.

3.3.1 Demographic factors and their economic significance

Looking at the household-level variables, we see that couple households and households with higher potential lifetime income, as proxied by tertiary education and full-time employment, are more likely to become indebted FHBs. On the other hand, households with high unemployment expectations have a lower probability of taking on FHB mortgage debt, providing initial evidence that households consider their future when making debt decisions. The magnitudes of these effects are relatively large, with full-time employment being associated with a 5 percentage point increase in the likelihood of becoming a home buyer – that is, it doubles the likelihood of someone becoming a first home buyer.[18] The effect of being in a couple is even larger at almost 7 percentage points.

Age and, even more so, household income have a smaller effect on the probability of becoming an indebted FHB. For example, a 30-year old is 2 percentage points more likely to become an FHB than an otherwise similar 25-year old (Figure 4). A $10,000 (or 17 per cent) increase in income for a household with the mean disposable income of $60,000 only increases the probability by 0.3 per cent (Figure 5).

Figure 4: Marginal Effect of Age on FHB Status
Figure 4: Marginal Effect of Age on FHB Status

Note: Shaded areas show 95 per cent confidence intervals

Sources: APM; Authors' calculations; HILDA Survey Release 14.0; RBA

Overall, these findings suggest the most powerful drivers of becoming an FHB appear to be life cycle-related rather than economic factors. People do not decide to become FHBs because they get a promotion, but because they get older and enter into married and de facto relationships.

As mentioned above, other than the overall level shift, we find no significant differences in the relationship between these variables and FHB ownership between the pre- and post-2007 periods (Table C1). Being in a couple household or having tertiary education does not change the likelihood of becoming an FHB across the two periods. Also of note is that the age of becoming a couple household has not changed appreciably between the two periods. While the split between married and de facto has changed between the periods, this has not been associated with any significant change in the likelihood of couples purchasing a house. Similarly, households at all points of the age and income distributions have a lower predicted probability of becoming an indebted FHB in the 2008–14 period (Figures 4 and 5).[19]

Figure 5: Marginal Effect of Income on FHB Status
Figure 5: Marginal Effect of Income on FHB Status

Note: Shaded areas show 95 per cent confidence intervals

Sources: APM; Authors' calculations; HILDA Survey Release 14.0; RBA

3.3.2 Preference shifts or housing prices?

Given the unchanged effect of demographic factors, and the fact that the period dummy is insignificant in Model 3, we see that housing prices appear to be playing a central role and that a preference shift is unlikely to have been important. When you take into account the change in the housing price index between the 2001–07 and 2008–14 periods, the marginal effect of higher housing prices lowers the probability of households becoming an indebted FHB by around 4 percentage points.[20] This is larger than the observed decline in FHB ownership between periods because of some offsetting effects from other variables such as income and FHB incentives.

These findings suggest that the underlying desire to become an FHB has not changed since the financial crisis. However, people's ability to, or comfort with doing so, has been affected.

3.4 Summary

We find that potential FHBs today are less likely to take on a mortgage and purchase a home than those earlier in the 2000s. Our results provide evidence that FHBs are being crowded out of the market by higher housing prices. It seems likely that this is related to external factors, such as investor demand and supply constraints in some cities, although we have not examined that channel here. While demographic factors are important determinants of home buying, they have not been changing significantly since the financial crisis. That is, people do not appear to be merely delaying the age at which they purchase their first home. In short, ‘generation rent’ appears to be an important phenomenon that is related to the rise in housing prices rather than a shift in preferences or changing demographics.[21] The effect that the hurdle of higher housing prices has on those buying first homes and the debt they take on is examined next.


For a discussion on the longer-term trends in home ownership see RBA (2015). [10]

Potential FHB households are defined as all renter households who are under the age of 60 years and have never owned a property. They account for around 20 per cent of all households in any given year. [11]

Dungey, Wells and Thompson (2011) provide an overview of FHB incentives in the 2000s. [12]

This model is similar to the one used by Kohler and Rossiter (2005). [13]

As before, all renter households who are under the age of 60 years and have never owned a property are classed as ‘potential FHBs’ and remain in the sample as our reference group (i.e. FHBit = 0). [14]

The estimated marginal effects from our preferred probit model are robust to the choice of error distribution (i.e. they are similar to those estimated using a logit model). [15]

We include FHB incentives to control for any state-level changes in policy that may have altered the ‘effective’ prices of housing for FHBs over time, particularly in 2008 and 2009. [16]

Results of this exercise are shown in Table C1. For robustness, we also estimate Equation (1) with time fixed effects instead of the post-2007 dummy and a local government area-level rather than a state-level housing price index. Results from these sensitivity analyses are reported in Table C2 and are largely similar to those reported in Model 3. [17]

As shown by Figure 2, the unconditional probability of transitioning into FHB ownership is around 5 per cent over the entire sample period. [18]

If there had been a change in the relationship between becoming an FHB and these variables across the two periods, we would expect to see a change in the peak or the shape of the age and income distributions rather than a level shift down. [19]

The average marginal effect on log housing prices is −0.08. We multiply this by the 48.6 percentage change in the housing price index between the two periods: −0.08 × 0.486 = −0.04. [20]

It is possible that people who are crowded out may, nonetheless, eventually purchase a house when they, say, receive an inheritance of money or the family home later in life. The sample period is not long enough to test whether this will turn out to be the case. We do, however, investigate the effect of assistance with home purchase from family and friends later in this paper. [21]