Rising house prices encourage younger households to spend: RBA paper

The positive flow-on effect of rising house prices on the overall economy has been highlighted in a RBA research paper exploring the relationship between home prices and household spending.

The paper finds that spending by younger, more credit constrained households is more responsive to changes in home prices than that of older households.

Mortgage lending conditions also play a key factor in household spending.

The paper arguing that if rising house prices are accompanied by more freely available credit, then the propensity for young homebuyers to spend is even greater.

“Younger homeowners are more likely to be credit as well as buffer-stock savers.

“Accordingly, loosening of credit constraints suggests a stronger link between home prices and spending for younger homeowners,” say Callan Windsor, Jarkko Jääskelä and Richard Finlay, authors of the report.

The findings reinforce the importance of the first-home buyer segment to the overall health of the economy – at a time when first-home buyer numbers are at eight year lows, according to Real Estate Institute of Australia (REIA).

Many blame the first-home buyer grants in NSW and Queensland that incentivise the purchase of new homes over more-desired existing homes for the drop in numbers.

The RBA report also found that young and middle-aged homeowners respond more in terms of spending, than young renters to rising home prices.

It also  highlights the importance of owning a house as a buffer against future financial troubles with households perceiving housing wealth as a “precautionary saving vehicle against unanticipated future events such as redundancy”.