On the other side of the footpath, it’s not unusual to hear millennials malign their parents for negative gearing their way to retirement, and inflating prices for today’s buyers along the way.
So which generation had it harder buying a home?
In the millennials’ court, we have the argument that buying a house today is far harder because the rate property prices have soared is well beyond that of wages growth.
In the pandemic alone, the median property price shot up 26 per cent … yes, more than a quarter.
Pinpointing exactly why this has happened is difficult. We’ve had years of lending deregulation, government incentives, tax breaks for investors and, more recently, record low interest rates. We’ve seen housing go from a human right to a wealth-creator. Roughly two million people today own investment homes.
The Grattan Institute calculated that, 30 years ago, the average house price was only a few times the standard annual income. Now it is 8.5 times the average income, according to CoreLogic data. That’s up from 6.8 times income over the past two years alone.
Your standard deposit for a home loan is 20 per cent. On today’s prices, it would now take somebody on an average income around 11.5 years to save up that chunk of cash.
Given this, it’s unsurprising that we’ve seen the rise of schemes to get people mortgages with lower deposits.
The finance industry has created a secondary money-spinner out of selling people insurance on low deposit loans, plus there’s federal schemes to help you avoid paying this insurance. You’ve also got the so-called “Bank of Mum and Dad”, where you leverage your parents’ property to buy … more property. And this election, we have shared equity schemes and supercharged deposits being suggested.
Specialists have noted that many of these schemes to get people mortgages with low deposits only really help if you already have a decent amount of cash or intergenerational wealth.
This adds to concerns that we’re heading for a wealth transfer from property-owning baby boomers to their children through inheritance. This will only exacerbate the divide between those families who own homes and those who don’t.
Sure, it may be hard getting a deposit together today – but can you imagine paying 17.5 per cent on the loan once you got it?
Even a rate hike was something this generation of borrowers had not experienced until just last month. When the Reserve Bank raised the cash rate in May from its historic low of 0.1 per cent, it was the first time it had gone up in 11 years. And even that left it super low, at 0.35 per cent.
However, high interest rates on your loan are still tolerable if the base loan is lower. This graph from the Grattan Institute shows how much interest people were paying on home loans at various times over recent decades, in relation to their disposable income. As that graph shows, the time of the biggest interest rate burden was actually in the mid-2000s, during another property boom when there were warnings of mass defaults.
We also know that interest rates only stayed shockingly high for a few years around 1990, before they declined. So, to get a picture of how much of a burden a home loan is on somebody’s finances, you also need to consider repayments on it over the entire course of the loan.
Essentially, that graph shows that people who bought in 1990 initially found it harder to pay off their mortgages. Repayments chewed up close to 40 per cent of their incomes. But the burden on them dipped within five years.
Contrast this with people who took out mortgages in 2021. True, they are starting off with a lower burden, but it’s a slower burn to financial relief.
One generation got to rip off the band-aid painfully, but quickly, while the other has a festering wound. (And they said buying your first home was the Australian Dream?)
There are many other factors to consider in this debate. Inflation was worse last century, which made the cost of living harder, although wage rises were also much higher, and the real value of your debt shrank more quickly. Unemployment rates also hit double digits in the early 90s, and stayed high for years, which cut a bunch of people out of buying altogether.
However, we also know that today’s generation is battling rising job instability. That makes it harder to secure a loan. It also makes it harder to get a pay rise, and the lower inflation times — at least until recently — meant that the real value of debts has not declined nearly as quickly as it used to.
Deregulated lending has offered up cheap cash, though.
Another way to look at this story is simply to look at rates of first home buyer loans throughout history. People might be complaining about it being hard to get into the market, but are they still managing it begrudgingly?
A RMIT Fact Check published this week found that many first home buyers entered the market in early 2020, when interest rates plummeted and incentives were being offered during the pandemic. When all is worked out for population growth, this is the story we get for the past few decades.
Rates for newbies were higher in 2009 than during COVID-19. A report released by Per Capita last week found that Australians’ rate of home ownership was declining rapidly, especially among those under 40.
On current trends, it estimated that fewer than 55 per cent of people born after 1990 would own a house by the age of 40, compared to a historical high of almost 72 per cent.
And we know that more people are renting.
“If you don’t own your own home by the time you retire, you are at greater risk of financial stress and poverty in retirement,” the Grattan Institute’s Brendan Coates says.
“And so we have a ticking time bomb.”
Whether you think the answer to this debate is inconclusive or settled, those dots on the Grattan Institute’s modelling about interest rate repayments are still troubling. People who have just bought are headed back to 2006 repayments with just a couple of percentage points in rate increases. And that’s the minimum the Reserve Bank would like to do to get interest rates back to “normal”.
It’s unclear what rising rates will do to property prices in coming years. Some economists — and even the RBA’s own economic models — are predicting property prices will drop, but their crystal balls have been wrong before. Even prices dropping might not make it easier for people who have not bought yet, because they could just be matched by rising interest rates that will make the mortgage burden much the same.
As it stands, you can forgive some millennials, who have not bought yet, for feeling jaded.