Comment on The RBA just scotched a theory about younger Australians choosing to not to buy a home

Forget the perception that younger Australians are frivolous with their money, or that they now prefer to rent than buy. The real thing holding Australian first time buyers back from buying a property is rapidly increasing house prices, says John Simon and Tahlee Stone, economists at the Reserve Bank of Australia (RBA). Rather than a shift in ownership preferences or demographic changes in the years following the global financial crisis, Simon and Stone acknowledge that higher prices are largely responsible for crowding out prospective first home buyers (FHBs) from the market. "Our results support the hypothesis that higher housing prices have crowded out potential FHBs from the market," the pair wrote in a discussion paper released on the RBA's website today. "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." Forget the smashed avocado with crumbled feta on five-grain toasted bread at $22 a pop and more as an example of the frivolous discretionary spending habits of younger Australians that are holding the dream of home ownership back. The real reason for declining home ownership rates, according to Simon and Stone, is the growth in house prices over the past decade. "It seems likely that this is related to external factors, such as investor demand and supply constraints in some cities," they wrote. "While demographic factors are important determinants of home buying, they have not been changing significantly since the financial crisis.