Financing first home ownership: modelling policy impacts at market and individual levels

This research conducted modelling experiments to examine the relationship between different housing finance conditions and people’s ability to buy a first home. The first simulated the housing market’s response to decreases in interest rates, while the second simulated the market’s response to variations in borrowing standards such as changes in financial regulations or allowing households to borrow more or less against the value of their homes. When interest rates decline, the cost of financing housing declines. The opportunity cost of investing in housing also declines due to the reduction in interest that can be earned in savings accounts. Thus, the demand for housing increases, which tends to lead to increases in house prices. The research model predicts that house prices rise by 33 per cent when interest rates decline by the magnitude observed between 1994 and 2017. The actual rise in house prices was 109 per cent, suggesting that the decline in interest rates is associated with approximately one-third of the rise in house prices over the last 25 years. The research also modelled first homebuyer assistance programs. Of the 1.6 million households who are renting in Australia that are aspiring first home buyers, 266,500 households or 16 per cent are eligible for a mortgage guarantee scheme, while 496,800 or 31 per cent are eligible for a shared equity scheme. Of those households who were found to be eligible, the modelling shows 22 per cent of would be assisted into home ownership by the mortgage guarantee scheme, and 41 per cent would be assisted by the shared equity scheme.