The Impacts of Borrowing Constraints on Home-ownership in Australia

Abstract

The analysis reported in this article incorporates direct measures of borrowing constraints into an otherwise standard model of the home-ownership decision in Australia. Borrowing constraints take into account mortgage underwriting criteria, household incomes and wealth, and the household's optimal level of consumption of housing services. Models containing borrowing constraint measures are estimated for households with heads ages 25-34, the age-group that is most likely to be moving into home-ownership. Consistent with previous findings in the US and Canada, borrowing constraints are significant determinants of the probability of ownership. Including borrowing constraints in the tenure-choice model results in a reduction in the independent impacts of household income and the relative costs of owning and renting, implying that in the standard model these variables are at least in part proxies for borrowing constraints. As wealth is the binding constraint for most constrained renters, the article concludes that government programmes to encourage first-time buyers should focus on reducing deposit requirements.