Softening house prices could spark new household boom

Young adults could spark a boom in new household formation by entering the real estate market in greater numbers as prices begin to soften.

In addition, the surge in first-home buyer rates could lead to a spike in the headship ratio, according to numerous experts. The “headship ratio” is the rate at which young adults form new households, which isn’t possible unless they stop living with parents and roommates.

Recent research from Australia and New Zealand Banking Group (ANZ) showed that the headship ratio for young people has declined significantly since the 1980s and 1990s. Many young adults who might have started families in the past are today still living with their parents. 

Daniel Gradwell, senior economist at ANZ, said the current headship ratio has made it clear that many young people have been priced out of the market. “The inability of young people to get into the market is a major source of frustration,” he told The New Daily. “A low ratio is potentially bad if it reflects that people aren’t able to do what they want to do.”

Fortunately, a series of factors are coming together to make entering the housing market easier for first-home buyers. Chief among them is the Australian Prudential Regulation Authority’s (APRA) recent crackdown on interest-only and investment lending, which has made it more challenging for investors to get cheap financing but easier for owner-occupiers to get a great first home loan.

Also, stamp duty exemptions and discounts for first-home buyers are making it easier for this segment of the market to buy homes in NSW and Victoria – two of Australia’s most expensive housing markets.

According to Michael Yardney, director of Metropole Property Strategists, first homeowner grants tend to help more first-home buyers into the market.

“The first deposit is the biggest stumbling block, particularly in Melbourne and Sydney, as it’s disproportionately more expensive [in those cities],” Yardney told news.com.au. “So how are people doing it? They’re choosing a smaller property, or many are getting help from the bank of mum and dad. They can either lend them or give them the deposit, or in some instances, get a guarantee for the loan.”

The surge in new first-home buyer finance commitments in NSW and Victoria following the rollout of the latest exemptions and discounts support this sentiment.