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New study finds low interest rates lock first home buyers out of property market

Long periods of low interest rates are responsible for locking many first home buyers out of the property market, new research shows.

The study, Financing first home ownership: modelling policy impacts at market and individual levels, revealed first home buyers often thought falling interest rates were a good thing, and were at times didn’t realise the counter effects of rising demand and increasing property prices.

Australian Housing and Urban Research Institute (AHURI) commissioned the report, which revealed falling interest rates were responsible for one-third of the value of house price increases over a 25-year period.

Over the same period the home ownership rate fell from 71 per cent to 66 per cent.

John Curtin Distinguished Professor Rachel Ong ViforJ, from Curtin University’s School of Accounting, Economics and Finance, and research lead author said lower interest rates had locked people out of the property market. 

In the 25 year period between 1994 and 2017, the average interest rate on owner-occupier mortgages fell by almost 5 per cent. As a result, demand for properties grew, and over this same period, house prices more than doubled. 

The research found almost one-third of the price rises were caused by lower interest rates, with factors such as housing availability, wages and population growth accounting for the remaining increase.

‘Falling interest rates may seem appealing to first home buyers, but in real terms, it only increases competition and pushes prices higher, sometimes out of reach for those trying to get into the market for the first time,’ Professor ViforJ said. 

The study also revealed 84 per cent of aspiring first home buyers did not have enough savings for a deposit and 71 per cent were unable to meet the mortgage repayments, which prevented them from entering the market.

Only 11 per cent of first home buyers did not face borrowing constraints.

The study also showed the housing market could see the return of young or lower income households if a continued rise in interest rates lead to a drop in house prices.

Professor Ong ViforJ said the study modelled two first home buyer assistance to support home buyers on lower incomes.

The first was a mortgage guarantee scheme according to the design of the Home Guarantee Scheme, while the second was a shared equity scheme modelled after the Help to Buy program. 

The research found a mortgage guarantee scheme could assist 22 per cent of qualifying first home buyers, while a shared equity scheme would assist 41 per cent of eligible home buyers, a quarter of which would be in the bottom 20 per cent of Australia’s socio-economic status areas. 

“Our research indicates that while both schemes will help some households into first home ownership, the Help to Buy shared equity scheme is likely to be more accessible to people on lower incomes than the Home Guarantee Scheme,” Professor Ong ViforJ said.

“It’s important to understand that while these schemes would support people living in lower socioeconomic status areas, they would likely also boost demand for housing in these entry-level markets.

“It’s imperative the introduction of any such schemes is matched by an increase in the supply of local housing in order to avoid fuelling further house price rises.”

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.

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