Last week, the Reserve Bank of Australia’s (RBA) Bulletin noted how high housing costs are disproportionately affecting younger Australians:
Median housing debt-to-income ratio for Australians under 39 years of age has risen 29 per cent in the six-year period to June 2010, compared to the 20 per cent rise for the oldest Australians in the same time.
The increases leave younger Australians with a median housing debt of 333 per cent of household income or more than double the 159 per cent for the over-60 crowd…
“The increase in the cost of housing has affected younger households, whether renters or purchasers, more than other age groups”, said the report…
Now the Galaxy Australian Debt Study has found that younger Australians are more stressed about repaying debt than any other generation:
People aged between 24 and 35 topped the debt anxiety list, with nine in 10 concerned about making debt repayments.
Big purchases such as a first home were largely to blame for the stress, with 55 per cent of people in this age group nominating rising rents and mortgage repayments as their biggest financial concern, according to the Galaxy Australian Debt Study…
“While most Australians are trying to be financially responsible, it is worrying that people aged 25 to 34 appear to be feeling the greatest strain,” Matthew Strassberg, senior adviser at Veda, the debt investigation company which conducted the survey.
The survey also found 15 per cent of people in this age group were likely to apply for more credit over the next six months, compared with 9 per cent in the remainder of the population.
This is where it can all go wrong, Mr Strassberg said.
“It is concerning that there are people struggling with their current debt levels but are turning to more credit as the answer, potentially edging closer to a debt spiral,” he said.
“While people can have large credit commitments, the debt spiral begins when a person starts slipping behind on payments and seeks yet more credit as the solution.”
The bi-annual Galaxy survey reveals Australians are facing unprecedented levels of debt stress as 82 per cent of the population worry about meeting debt repayments, up from 75 per cent in September 2010…
The research also suggested one in five Australians were struggling to pay off their credit commitments.
As a means of coping with the stress of debt, 87 per cent of consumers have chosen to cut back on everyday spending and lifestyle, 49 per cent have cut back on groceries and 35 per cent received assistance from family or friends…
“Borrowing from family and friends is common, so is wanting to access superannuation early.
That more people are worried about repaying debt now than in September 2010 is interesting given that the official ratio of household debt to disposable income has fallen over the past year, from 154% in September 2010 to 151% in September 2011. Perhaps the reasons for the rising anxiety levels have to do with:
With the baby boomers starting to retire, and needing to liquidate their housing assets to fund retirement (remember: they own roughly half of Australia’s housing assets, including 57% of all investment properties), the question beckons: will younger Australians be in the position to buy these homes from the boomers at current prices?
From the above studies, the answer is doubtful.
unconventionaleconomist@hotmail.com
It’s not only retirement ‘they’ are going into; they’re dying, as well! The last 3 properties I’ve run a ruler over here in Auckland, have been….deceased estates. The family don’t what Dad’s old property now that he’s gone; they need the cash to pay off their own mortgage debts.
Janet – you are assuming that. Normally when a homeowners dies at an advanced age, the children already have their own homes, so selling and distributing is the usual outcome.
But getting back to the OP.
Quote ““While most Australians are trying to be financially responsible, it is worrying that people aged 25 to 34 appear to be feeling the greatest strain,” Matthew Strassberg, senior adviser at Veda, the debt investigation company which conducted the survey.
The survey also found 15 per cent of people in this age group were likely to apply for more credit over the next six months, compared with 9 per cent in the remainder of the population.
This is where it can all go wrong, Mr Strassberg said.”
It is the ad hoc debt on credit cards and car loans that send people into the financial abyss in the majority of circumstances. More education on the dangers of credit cards in particular is needed in secondary schools.
Six credit cards are not abnormal, and anymore than one or two is too many for most families to handle responsibly.
To a large extent younger borrowers have always been under more stress than older more financially secure borrowers, so this is really just showing us what I would have expected. Whether it is greater or lesser than previous generations, is really the issue, and that is hard to judge.
Peter,
Can you provide some evidence to back up this comment:
‘It is the ad hoc debt on credit cards and car loans that send people into the financial abyss in the majority of circumstances.’
Credit cards and unsecured/pay day loans defintely have the highest interest rates, but I seriously doubt that they represent the largest cash flow commitment for anyone filing for bankruptcy, or who is experiencing financial hardship.
I agree that more education regarding credit (in general) is required in Schools.
if all schools syllabus is govt dictated and its in govt interest to atleast keep the bubble at current levels, then financial education in schools are well away…
no tin hat, just reality
Actually Credit card debt does show up in the figures a lot. Indeed for many people the amount that actually sends them over the edge can be shockingly small – A few thousand dollars is not uncommon. Peter has a good point, it is the TOTAL debt that is the problem and having more than 1 credit card that is not paid off every month is the begining of trouble for many of these people.
Using credit to pay your bills when you have no money left is usually a very slippery slope, that many do not recover from.
The figures are out there if you search google etc.
Isn’t that just my point, Peter? Deceased estates add to the pool of property supply, and will continue to do so at an increasing rate, I’d suggest. Whether it’s the physical house ( if it’s in good nick- which many aren’t if the sole survivor is the man!) or the land.
Baby boomers are just retiring now – the 1946 cohort – and their life expectancy has a few years to run yet. I’d say in 15 years or so we’d see a much large lump of that following through, at which point none of us can confidently predict the market’s even vague direction.
Peter, now don’t tell us that mortgage stress and home repossession is due to credit card/car loan debt and NOT due to the mortgage itself!!
.
If you really mean that, then I think you deserve a PhD in “Bait and switch”.
Yes Mav, the greatest damage is done by ad hoc debt. I’ve never seen a case of genuine hardship where there were no credit cards out of control. Not just one card, but six out of control cards is not unusual, perhaps totalling $40,000 to $100,000.
I realise that you are having a shot at me, but I think that you underestimate the damage that continuous credit facilities can do in the wrong hands.
Anecdotal evidence of what you see at grassroots level is fine, but it does not convince me at all nor should it convince anybody else.
.
Let us see you present some emperical evidence, like this blog does.
Peter, I suspect what you say has merit – from observations of family and friends and the willingness of those struggling with debt to consolidate smaller debts into mortgage debt.
thanks 3d1k – however Mav is correct, I don’t have any emperical evidence to support what I am saying. There is a lot of data on our combined credit card debt, number of cards, debt per card etc. but I’m specifically referring to homeowners who have a large credit card problem on top of their home loan to pay.
It is something that I see a lot of, but I understand that others are unaware of a problem that they haven’t seen or encountered themselves.
Serial credit card abuse is a bit like gambling, they don’t like to admit it until it is too late, and several cards are maxed out.
At that point even consolidating the credit card debt into the home loan may no longer be an option.
Surely the credit card issue is just mismanagement of the underlying problem of mortgage debt being too large?
Stormy Waters – yes that can be the problem, but not in all cases.
You would be surprised at how much credit card debt people carry. Remember I don’t see the people who manage debt well. they have no need of assistance.
But even FTB’s come to me claiming that they have $25,000 in savings whilst they disregard the $15,000 credit card debt.
In reality their net savings is far less than they think, and I would think that applies to a far greater percentage than many realise.
We should be a well balanced group of individuals, because retail therapy has been popular in Australia.
I agree – most abuse is with adhoc debt. I would be interested to know how many of those people used the adhoc debt because they had a mortgage and needed an additional source of funds to fund their lifestyle on top of their mortgage?
In the end what matters is the overall liabilities of the person – credit card, mortgage is of no consequence. If they are resorting to cards because they have no cash flow (i.e a mortgage is eating it up) then I would say the adhoc debt is more a symptom of the real problem.
There is always the financially irresponsible though that will use adhoc debt to get what they want now. That will never change.
You guys have got it all wrong! Haven’t you read all those wealth books and magazines? There’s good debt and bad debt.
1 x $400K mortgage = Good debt
5 X credit cards, $50K worth maxed out = Bad debt
It doesn’t count if it’s housing related. There’s no anchor.
They are the products of former failures. Their fathers and mothers failed them, in all regard. But we can’t say the truth so we look for someone else to blame. A bank, a politician.
I know a twenty year old who just bought a nice sports car for 14000 dollars. Paid cash that was saved over a 8 month period from a job paying under a grand a week. This young person knows how to deny themselves what they don’t really need, knows the danger of debt and chooses to live very cheaply in order to spend money on things that matter most to a twenty year old. It’s all a function of parentage.
I still don’t understand why baby boomers have to sell up for retirement? isn’t the whole point to have a recurring income in retirement and that is why investment properties are so attractive?
I mean, you spend 10-20 years paying back the debt in your younger years and by the time you hit retirement the property should be paid off and you have recurring income for the rest of your life.
I mean, the majority of these properties were bought 10+ years ago so the capital growth can cushion a 20% or even 30% fall.
Can anyone explain this as its repeated a lot with no explanation.
youve made the assumption that PPOR are paid off and that the investment property is cash flow positive.
Im not exactly sure on the figures but this is generally not the case.
Georgie. According to the latest ATO Statistics, two-thirds of investment properties are negatively geared – i.e. losing money each week. This is unsustainable in retirement. Plus investors lose negative gearing tax offsets when they retire, making such property investment less attractive. http://www.macrobusiness.com.au/2010/11/baby-boomers-retirement-and-asset-prices/
Most boomers own their home, or have insignificant debt. Most won’t have to sell their homes, and very few have investment properties, although some do own their retirement property, and they will sell their PPOR. It’s a bit early to say whether boomers will follow the previous generation into a sea change, or stay put where their friends and family live.
The IP’s are held by the very late boomers and early gen Y. They are the ones who bought the financial self help books and took the IP trip.
But the myth makes great headlines, so it will live into perpetuity.
Peter. The latest ABS household wealth survey showed, without a shadow of a doubt, that 57% of ‘other’ properties (investment properties and holiday homes) are owned by the Boomers.
Yep and Boomers are on the higher salaries so they would stand to gain most from negative gearing, meaning that its more likely that the Boomers are negatively geared.
This idea that Boomers are more likely to have their IPs paid off I think is faulty.
Perhaps that is the survey result, but it’s not what I see at grassroots level. Holiday homes that will become their retirement homes I will accept, but simple IP’s in working class suburbs are not well represented amongst boomers.
Buying homes and units in holiday areas doesn’t have a great affect on the housing costs and needs of working men and women.
Do you have a breakdown of those figures into holiday homes and rentals in suburban areas of non holiday cities and towns?
forgive me Peter but ill take the ABS survey numbers over your anecdotal evidence at the ‘grass root’ level..
TS Spencer “Other properties” actually includes a lot more than holiday homes and investment homes.
http://www.theage.com.au/business/grey-cloud-gathers-over-housing-market-20111026-1miy6.html
You can see from the second graph that the late or youngest of the boomers and the first of Gen X who hold a significant number of investment properties, as I stated.
I would suggest that the boomers hold the majority of offices, commercial, industrial and retail properties, and very few of these are held by younger generations.
If you strip those properties out of the boomer numbers, you would get a picture that closely agrees with my contention.
But as I stated earlier, the myth makes good reading, so it will outlive all of us.
So you accept anything that you like. That is your choice to make.
Many baby boomers have gone guarantor over their kids property mortgage, to help them out, so they can afford a house. Boomers are actually exposing themselves to a lot of risk if the value of their kids house goes down and their primary house is used as collateral.
It would be awesome if you could find out the average dates of when the 2 out of 3 negatively geared properties were bought. In my experience the majority would have been pre 2003. If this is the case then even though the properties are negatively geared it is only done so to leverage to buy another property. This 2nd or third property could be sold off in hard times leaving the initial investment and a large draw down facility available to the BB.
If the majority of the 2 out of 3 negatively geared properties were bought in the past 5 yeas then I would agree that due to poor foreseeable capital gains then BB’s would sell off.
Paying your investment property a dividend in the hope that it repays you with some capital growth does not make much sense in retirement. Retirees need cashflow to live and negatively geared investment property is a cash drain.
Exactly right. Retirees should be moving (or already have moved) from growth to defensive/income assets.
Whether they actually have moved in the case of property remains to be seen. I suspect we’ll see a large number of retirees who are shocked by large capital losses in property, just as we saw many who were shocked by their sharemarket losses during the GFC.
georgie, my in-laws are in their mid-70s now and we are trying to suggest to them that they need to get out of their 5 bedroom McMansion while it’s still worth something. Beyond a certain point, the maintenance and cost to run a large family home is just a drain of cash.
Great post Leith.
That quote from RBA was gobsmacking: 333% of disposable income…interesting to see what that amount was for 25-34 year olds in the 1970′s and 1980′s…
“People aged between 24 and 35 topped the debt anxiety list, with nine in 10 concerned about making debt repayments”
also to some of the statements in the article, when have they not been a major concern? when has repaying the home not been a stress? Was it not a stress 30 years ago?
Actually, repaying a home probably wasn’t much of a stress 30 years ago. Most households were single income (no need for dual incomes back then), wages were indexed to inflation and real mortgage interest rates were negative – i.e. mortgage rates were capped below the rate of inflation.
Not really correct – wages rises were large and they happened often, but they followed inflation, they did not preceed inflation.
I think if you wanted to look at the effect of the punitive interest rates of previous decades vs the low rates of today, you should look at the mortgage arrears rates of the day.
What do you make of the housing occupancy costs in Para & fig 10a here –
http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4130.0Main+Features22009-10?OpenDocument
Peter. High inflation and high wages growth inflated away the boomers housing debts. Period. The younger generations cannot expect such favours.
Yes we agree on that much, high inflation did negate much of the debt. It should be noted though that no one actually requested the inflation, it was a product of global inflation and political mismanagement.
” Most households were single income”
The ratio of number in the labour force to number of households seems unchanged in the last 30 years.
1981 Census – labour force = 6,690,530, number of households = 4,668,909
ie 1.43 workers per household.
Latest figures – labour force = 12,095,200 (ABS), number of households = 8,398,500
ie 1.44 workers per household.
Happy to be pointed to other figures.
Figures don’t account for the increasing number of retirees.
I would be interested in the average household’s time to pay the mortgage. I don’t really care how many people worked – or interesting statistics. All I’m interested in is simple – how effective is my work in getting me to a debt free position? How much will one unit of work buy in terms of housing?
I think its obvious to most people that this has risen. While two people may of been working how long did it take to pay off the entry home loan then vs now in our capital cities for instance? How much would the average worker have to work to buy a house outright?
Housing costs per month, etc do nothing to prove things are the same – in effect it could just mean more payment is going to the interest, or that people are paying off their principal slower in percentage terms than they could have in the past.
Also a lot of Australians used the gains in their homes as an ATM – how does that figure into the cost of contribution? If I’m not paying off at the maximum rate in the 1980′s and growing my loan size as a result then using previous decades figures for loan life doesn’t work (i.e they could be getting more benefit even with the same level of costs).
We purchased around 12 years ago – before the house price bubble really took off – and I can honestly say that even though we are only an average earning household, we have never found servicing the mortgage to be stressful. But to purchase the exact same house again today – or even a number of years ago, well before the words “LNG boom” were mentioned here in Gladstone – would be anywhere from financially stressful to outright impossible, despite significant real growth in our household income.
+1 Lef-tee, same situation for Mrs Jackson and I on the other side of the continent.
Prince. Aggregate housing debt to disposable income was only 25% to 35% in the 1970s and 1980s (compared with 135% currently), and mortgage interest payments consumed roughly half as much household income as today.
Thanks Leith. I still remember that chart comparing a 1970′s/1980′s purchaser (Melbourne I think?) and one of today.
Completely different situation. I don’t understand why the spruikers don’t understand this – fallacy of composition or some other bias that won’t let them look at the data objectively?
I know the chart you’re talking about Prince, I thought I had it saved in My Documents but I can’t find it. Will dig in a few other places and post if I can find it.
I’m going to try to put all our charts together in one place for easier reference over the Xmas break (UE and I will be holding the fort while the other chaps have a break).
“georgie”
Unless you own 5 or 6 residentials outright you will not be making enough profit from rent to fund the lifestyle you feel you deserve. Most in this class probably own 1 or 2 homes to rent, say $1000/week income. Now take out tax, maintenance, rates and then divide it in half for 2 people retired and you have FU*K ALL left to spend on travel new Jeddas and plasma TVs.
- Once you’re retired the tax take goes down (at least, as I understand it)
- The income would/should be used to supplement super and/or pension income
That’s why a possible solution is to give Australia the ‘big bird’ in retirement, and retire with other ex-pats in Asia e.g. look at how many BBs are retiring to Bail for example. You use the income from your one, hopefully fully paid off, home and use the income stream to provide you with real purchasing power in that developing Asian nation.
Australia is a rip off for most goods and services. Housing is just another in a long list of overpriced goods. So, better to recognise this and make other arrangements. While 200K can often provide palatial style living in some places in Asia.
Yeah, I’ll take on another $500K worth of debt just to be nice to those lovely Baby Boomers.
I’m such a nice man.
Cool, I’ll make sure I keep a BB sympathetic government in power also.
Can’t have them starving in their McMansions now can we?
Most young people I know are only buying when they have such a large deposit to offset the affordability.
The real story is in the social changes that the high living costs bring. Who knows what that means to their future choices? Do they put off having kids/not want to have children? That’s the first example that comes to mind.
Agreed, most people in their mid 20s I know at work who bought recently had at least 30% deposit (saved up with their spouse).
However I do have some friends around my age (20-23) that bought in the last 3 years who are really struggling at the moment. One (single income) had to move back in with his parents, another (dual income) recently had a kid and are really struggling… The only guy I know my age who doesn’t seem to be in trouble works as a tradie out in WA and has most of his rooms rented out.
I just wonder how this will affect our demographics in the future – i.e who is currently having all the kids? Will migration keep it going? Do we rely on government support to fuel our baby boom in certain parts of Australia as that’s the only way to afford kids without too much stress (high birth rate correlation with welfare/single parent suburbs).
Then there is the problems with the health system, and many more covered. House prices seem to exacerbate the demographic trends for the worse IMO. I just never understand how society can see rising house prices as a good thing.
A lot of home owners treat their home equity like a saving account. If house prices falls 10, their saving is totally wiped out. They are correct to be anxious.
“People aged between 24 and 35 topped the debt anxiety list, with nine in 10 concerned about making debt repayments.”
I’ve said it before, and I’ll say it again…
Inter- …
Generational …
Wealth …
Transfer …
ie. the Youngers pay the Olders an increasing fraction of their income, because, well, ah, they “got in” afterwards…
aka systemic theft
Cynical? Yes.
Effectively true? Yes, unfortunately…
“ie. the Youngers pay the Olders an increasing fraction of their income, because, well, ah, they “got in” afterwards…”
Not true.
Take an FHB household with an income of 1.5 times the average wage at the time (RBA table G6 col F) buying a house with a loan of 75% of the median house price at the time.
Currently, such a household would be paying 29% of income in repayments (including principle and excluding the 2 recent rate cuts).
20 years ago they would have been paying 32% of their income in repayments.
25 years ago they would have been paying 29% of their income in repayments.
Older people paid as much as people today pay.
Except the difference is that household is now likely dual income instead of likely single income?
Russell,
Run your figures for 5 years and 10 years AFTER the purchase of house. Assume the wife has a baby and cannot work for 5 years.
How old is the wife? Can they afford to make payments and raise their child?
+100.
.
Boomers have captured the pollies (who are BBs themselves) on both sides of the political divide and instituted policies that help them transfer their debt to Gen X/Y and convert it into “wealth”, just in time for their retirement.
+1K Mav.
Unfortunately it is the mice in charge of the cheese. I don’t know how they get away with policy decisions that obviously bleed younger people dry. Fairly blantant though………
Unless you are a Boomer loathing Gen X like myself! All jokes aside, in first year economics/business degrees in early 90′s, the lecturers were very clear on the following point.
This graduating class were almost guaranteed positions over the longer term as businesses simply wouldn’t have enough senior execs once the boomers started to retire. It was presented as a demographic opportunity.
And this was in 1992 ….
Before getting too excited you should take a little time to look at the recent ABS study of FHB housing costs. Have a look at this table:
http://img707.imageshack.us/img707/5893/fhbs.png
Housing costs as a percentage of income for FHBs with a mortgage are little changed over the last 16 years and are actually lower than in 1995/6.
Another interesting fact is that the number of earners in a FHB household is also little changed over 16 years. That most households had single earners in the past is a myth as shown here by the ABS:
http://img684.imageshack.us/img684/6094/empf.png
Compositional bias, Russell. Only higher income FHBs can buy nowadays.
Provably false. There is indeed a compositional change since but its the opposite of what you are claiming.
That ABS table shows FHBs incomes:
1995/6 $1307 = 198% of 12/95 average wage (RBA G6 col F)
2009/10 $2006 = 163% of 12/09 average wage (RBA G6 col F)
In 1995/6 FHB households, relative to the population, had HIGHER incomes than in 2009/10. The opposite of your claim.
Your first link shows that the wage of FHB when normalised to 2009/10 dollars has nearly doubled …
Ignore those figures, I didn’t account for the normalisation.
However, we know that the composition of fhbs in terms of income relative to the population is unchanged since 1995/6 and there is therefore no bias as suggested by UE. In the recent housing cost paper the ABS say:
“Over the period from 1995-6, the distribution of equivised disposable household income of FHBs with a mortgage remained broadly unchanged. The proportion of people from FHB households with a mortgage who were in the bottom three equivalised disposable income quintiles has remained unchanged between 1995-6 and 2009-10 at 39%”.
They also say that FHB inomes for 2009-10 were 19% above average. This is a little less than the Productivity Commission reported for 2000-1. They reported then that FHBs had an income 21% above average.
http://www.pc.gov.au/__data/assets/pdf_file/0016/56302/housing.pdf
It seems fair to say that the relative income position of today’s FHBs is little changed over the last 16 years. The further back we go we may find that FHBs had even greater relative incomes.
If nothing has changed Russell, why does it take stimulus to get FHBs to actually buy? Why does the Govt need to bribe our young people into buying a house?
“If nothing has changed Russell, why does it take stimulus to get FHBs to actually buy? Why does the Govt need to bribe our young people into buying a house?”
Grants for FHBs are not new. They have been around at least since the early 1960s. At times, the grants have bee proportionally bigger than they are now. The government has always support FHBs.
UE has already spotted your first blunder.
Also your figures start in 1995. The period in which a single earner could afford decent housing (in Sydney) was much before then.
You would do far better to pull your head out of your page of figures and actually look around the society you live in. The problem is obvious.
In my line of work in Sydney, every person who bought under $500k to save on the stamp duty was either buying with a partner or with their BB parents backing their purchase.
I did not see one single gen X or Y purchase a property on their own. Of course what I see is a very small area of the market but the majority here is either buying property with duel incomes or the backing from richer BB parents.
Its a shame that by the middle of this year the majority of these purchasers who had 5% – 10% deposits will lose half of that equity as in the short term, so much demand has been brought forward even if we don’t include economic instability there will be no more buyers to push prices up.
next year*
“Housing costs as a percentage of income for FHBs with a mortgage are little changed over the last 16 years and are actually lower than in 1995/6.”
You are conveniently overlooking the fact that these # are normalized in 2009-2010 dollars.Your FHB must now be earning 70% more to for this “percentage of income” to be stable else they would pay 40%+ of their income instead of 24%.
not sure if these normalized # take inflation into account (50% over the period).
It’s from the ABS, so generally they use CPI (as far as I am aware).
You can bang on with facts and figures all you want. I rely on stories.
Twice this weekend I was approached at Xmas parties by mid-30s folk wanting me to look at their properties that they were unloading. I knew the town was hurting but that is ridiculous.
Worse part is they were the same people I warned. Now they’re offering me 25% discount on what they paid two-three years ago. And the reason for the panic?
They’ve upgraded. *sigh*
Isn’t it funny how stories we hear concerning people’s experiences, are more poignantly real than seemingly indisputable stats? I know the end of the property bubble is unavoidable, but I still feel some compassion for those who are going to get bitten on their collective botties. It’s like when your child finds out there really is no Santa.
Mining Bogan! Classic! Seeing as we are talking about affordability comparisons. My folks bought family home in 1979 for 60K. One middle class parent working. My mother claimed that while they didn’t have a lot of money, they didn’t exactly struggle either.
House in same area now would average $750K. Say you had 20% deposit, that would just about be one full-time wage on mortgage.
I don’t believe it is remotely equivalent. Gen X is getting screwed.
Absolutely. You don’t even have to go back that far. Bought my first place in 1997, Grad Eng on $35K, paid $72K. Same house now valued at $380K, same position in same organisation now paying $60K.
Anyone who believes it’s still the same needs to up their dosage.
Too true. And its all because of tinpot theories of modern genius economists and politicians.