Updated: Aug 26, 2020
Is it possible to have your avocado and eat it? Apparently not, as the habit of eating overpriced toast with topping has been linked to the Millennials’ inability to enter the housing market.
In Australia, baby boomers enjoyed unprecedented income growth and wealth creation, mostly driven by the growth in asset prices; while young Australians are increasingly locked out of homeownership.
Now, I should say that I’m actually not a Millennial. As a child of the late 1970s I am still considered a member of Generation X. Even Millennials are not that young anymore, and herein lies the problem. These twenty-thirty-somethings are now well into their careers and family formation, but doomed to a life as a renter.
Sure, renting doesn’t have to be a punishment. But in Australia, it is punitive by design. A lack of tenant rights and protections leaves renters exposed to the whims of wannabe landlords and their real estate agent henchmen. Based on that experience, most people develop the desire to escape the rental shackles by acquiring their own home at some point (>> ING survey finds 40% of renters want to buy due to “being tired of renting”).
Let’s set the record straight and find out if it’s really all due to young people’s self-indulgence and expensive café breakfasts:
Average house prices in Sydney now 12x the average income
Baby boomers had it a lot easier to purchase their first home. Yes, we have all heard the stories of sky high interest rates and how difficult it was back in the 1980s. This narrative ignores the fact that the average home cost 3.5 times the average salary in 1985, but have increased to 8.2 times since in capital cities. In Sydney, Australia’s most expensive city, it’s even 12 times the average salary. Nationally, the proportion of income spent on mortgages has climbed from 28% to 36% (Source: News Corp).
The fact is that house prices grow significantly faster than wages, (Source: Business Insider), exacerbating affordability issues for younger Australians.
While historically low interest rates make it cheaper to borrow money, it also makes it harder to save for a deposit when you don’t earn much on your money in the bank.
A 20% deposit, as most banks require from first home buyers, is a huge chunk of money in a city like Sydney where the average house price is over $1 million. Or the equivalent of 10,000 avocado on toast brekkies valued $20 each.
Higher education sets Millennials back
It’s interesting to live in a country where higher education and homeownership are pitched against each other. Most countries encourage tertiary studies as higher educated citizens typically have higher lifetime earnings and pay more into the taxpayers’ kitty.
Educational status also translates to higher social status in most countries. But now education is seen as yet another self-indulgence that prevents Millennials from owning a home. If you believe the media, you have no-one but yourself to blame if you squander valuable years at university – time that you should spend working and acquiring property to get a 'foot on the ladder'.
The Australian Millennial Report 2019 found that the traditional path of finishing university and starting full-time work no longer helped Millennials achieve success. Co-author Tom McGillick is quoted in the Domain saying that a degree is not a straightforward path to prosperity any more. He said “we’re experiencing much greater job insecurity.”
So while Millennials are better educated – one third hold a degree, compared with 1 in 5 baby boomers, this doesn’t give young Australians any advantage.
On the contrary, they shoulder the double burden of HECS debt and significantly higher cost of housing than older Australians (tertiary education was free between 1974 and the mid-1980s in Australia).
Boomers receive more government subsidies
The Actuaries Institute finds in latest green paper, Mind the Gap – The Australian Actuaries Intergenerational Equity Index, that inequality in Australia between generations rose to a 20-year high. The report reveals that government spending has been skewed towards older generations with increased health, pension and aged care spending, while unemployment benefits remained low.
The Institute also finds that the rate of home ownership for the 25-34-year-old age group has fallen from 51 to 37% over the past two decades, but has remained more stable in older age bands.
While personal choice plays a role, few would dispute that young people’s ability to buy into the housing market has fallen. At the same time, rapid rises in house prices compound the wealth of those who own housing already, typically older Australians. (Source: Mind the Gap – The Australian Actuaries Intergenerational Equity Index )
Where to from here?
Australian demographer Mark McCrindle said many young Australians would benefit from a $3.5 trillion transfer of wealth from their ageing parents over the next two decades (Source: News Corp).
In a predicament of our times, we have to wait for our elders to pass away to enjoy a slice of the wealth and a reasonable sized home - if they don't squander the inheritance on $50,000 European river cruises.
Not that your kids need it anymore, they would have moved out by then.