Forget record low rates, younger generations pay most for housing

Think Tank Per Capita has released a new discussion paper entitled “Generation Stressed”, which shows that Australian households have experienced “a significant increase in the lifetime expenditure on the median mortgage” over the generations, specifically:

  • “For a Silent Generation family buying in 1970, the average repayment cost over the course of the mortgage was 11.2% of their gross income”.
  • “For a Baby Boomer family buying a home in 1985, the average repayment cost over the life of the mortgage came out at 19.5% of gross income”.
  • “For a Generation X family though, who bought in 2000 and have approximately nine years left to go on their mortgage, we estimate they will spend 25.5% of their gross income on servicing mortgage debt”.
  • “That is a 130% increase in the lifetime cost of owning a home over 30 years”.

The next chart summarises the results:

Mortgage repayments to income

Younger generations paying more of their lifetime’s earnings in housing.

Moreover, younger generations are remaining indebted for longer due to low inflation and wage growth, which means debts are no longer inflated away:

The household debt of the Silent Generation family was worth around 3.7 years of median full-time male annual earnings in the first year of the mortgage, but after five years over half of the debt had been inflated away to just 1.8 times annual earnings.

Thirty years later, the initial mortgage debt taken on by the Generation X family equated to 5.6 times annual earnings, and was still at 4.1 times after five years.

We estimate the Gen X family is paying $1425 per month on their mortgage in 2021. If they were on the same repayment trajectory as the Boomer family their monthly bill would be $910, while if they were on the Silent Generation trajectory it would be just $440 a month.

For the individual family, this is a huge loss of income – almost $1,000 a month – that would be better directed toward education, health or other living expenses. For the nation, it represents a significant constraint on household consumption, which accounts for more than half of Australia’s economic activity.

Ultimately, we argue that the role of inflation and wage growth needs to be front and centre when looking at changes to mortgage affordability between generations, and that our principal measure of inflation, the Consumer Price Index (CPI), fails to adequately account for the increase in the cost of living for mortgagee households.

I conducted similar analysis and came to similar conclusions in a special report released in 2016, entitled “Why common housing affordability measures are wrong”. In that report I noted:

The inherent problem with [most common] affordability measures is that they only gauge initial housing payments on new mortgages at the particular moment in time, and not repayments over the full 25 to 30 year loan term…

Today’s home buyer is facing a much more difficult loan repayment schedule than at any other time in living history due largely to the combination of high home prices, low inflation and low income growth:

ScreenHunter_15711 Oct. 26 19.44

Basically, when you take out a mortgage in a world of high inflation, your payments are ‘front-end loaded’ and reduce quickly over time.

But in the current world of low inflation and low wage growth, repayments consume a large proportion of your wage at the start and they’ll keep doing so for decades.

Unconventional Economist
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  1. working class hamMEMBER

    Get out of here with your facts and logic. We need lower rates and higher prices.

  2. Professor DemographyMEMBER

    Ain’t this the important truth. Any deflation elsewhere is immediately extracted into this housing vortex.

    • Yep, housing prices are like a sponge that absorbs excess discretionary income in an economy, instead of allowing for homes to be paid off sooner, the banking sector is allowed to take this excess and lever it up, magnifying asset prices in these non-productivity enhancing objects and creams off a % of the ever growing debt burden. If a govt bank ran this show and they were only allowed to use bank smarts to loan commercially you might have a hope of channeling this excess into productivity enhancing activity but who would feed our politicians in the game of mates if we did this?

      • Another solution would be to solve the shortage so houses would sell at the marginal cost of production – like milk, bread, electronics, cars, etc.

        • Professor DemographyMEMBER

          The amount of housing that needs to be available for immediate sale to do that is to my understanding huuuuge.

          • It is very simple. We either build enough housing OR people miss-out. Which do you prefer?

            I prefer to build the housing. If it is a huge amount then that’s what is needed for our huge population.

          • The problem is people aren’t buying one carton of milk as per their immediate need. They’re buying three cartons, consuming one for themselves, and rationing out the remaining volume, at a full-cream profit, to people who couldn’t immediately afford the milk in the first place. Then they’re allowing foreign buyers to purchase milk and just leave it in the fridge unopened!

        • Someone ElseMEMBER

          There is no way to get to marginal cost when the incentives to accumulate and hoard housing are so huge.

          Remove negative gearing, introduce land tax, remove the of use ‘equity’ to gear other loans, corral deductions to direct income from ‘investments’, have yearly capital gains assessments, and the other good options suggested by the peeps here.

        • I don’t think we actually have a shortage…

          Do we have enough houses to house everyone in Australia? The answer is probably yes.
          Do we have enough houses in Australia, for every baby boomer to buy and own 10 investment properties? The answer is clearly no.

          So its not that we have a shortage of houses.

          The solution is to take away the favourable tax treatment that resi housing gets, over and above every other asset class for a start..

          • You sir are a “shortage-denier”.

            I thought I had driven them all from this site, but clearly you are here now.

            There is enough housing in Australia to provide adequate shelter for everyone here, however that would require communist-style allocation of housing and would require a level of sharing that many people here are not comfortable with.

            It would be interesting if housing was allocated on the basis of need until we could get the shortage removed.

            For example:
            8 migrants are renting a 2-bed unit in Fairfield and one travels to Belrose Woolworths to work.
            Meanwhile widow Granny Smith lives in Belrose in a paid-for-in-1980 5-bedroom house.

            It would make sense during this “shortage emergency” to move Granny Smith into the unit in Fairfield, and move a bunch of the migrants into the Belrose house. This would save travel time, save the environment and reduce the risk of COVID spread.

            The problem is that since around 1970 Australia has added either not enough, or barely enough extra housing to cope with the extra people. There is a problem with the quantity. To stay affordable, a housing market must have an obvious abundance of housing. Once speculators get wind of a shortage they can create a nasty cycle of price rises.

            There is also an extreme problem with the quality. Most of the extra housing created since 1970 is grossly inferior to what went before it. Post-1970 housing developments are simply undesirable. Any person living in a post-1970 place wishes to become richer and move to a pre-1970 development.

            The pre-1970 decent housing with decent sized yards, decent access to rail and proximity to jobs, is in extreme shortage and sells for extreme prices.

            Quality does matter with housing. If size, structure and location of housing is irrelevant then we can dump 10 million cardboard boxes in the Simpson Desert and declare there is no shortage of housing in Australia.

            On the other hand, go out and try to rent something decent at a reasonable fraction of an ordinary wage and the shortage should be obvious to you.

            The solution is to take away the favourable tax treatment that resi housing gets, over and above every other asset class for a start..

            That might be a good start, but it would still leave millions of people stuck in inferior dwellings. The quantity and average quality of housing stock needs to be increased. We need a huge physical improvement in housing.

          • Even StevenMEMBER

            Well said, Claw. I doubt he will put his head above the parapet again.

            Shamefully I used to be a believer that housing affordability was primarily a financial phenomenon but some critical thinking sparked by you and others put that to rest.

            I am in favour of mid-rise and high rise development in appropriate areas (Public transport hubs, proximity to commercial) but NIMBYs still seem to have the upper hand in Australia. When did we become so selfish?

          • I’ll have some of Claw’s shortage with a side of finance. Fact is, limiting availability of debt would constrain prices closer to wage growth and prevent feedback loops in an escalating price cycle. It is not the only answer but much easier to implement and would have an impact on prices. I’d like to see the comparative of price rise reactions to interest rates and macro prudential vs supply. I’m sure both would be material to prices. The excess and mis allocation of capital to non-productive assets is what smart economies avoid. The debt hangover also crushes future growth and enslaves future generations seeking shelter providing windfall gains to people based on birth year. You’d only let that happen as a policy maker if you were genuinely corrupt and sure you could exit rich before the SHTF.

  3. Great post UE. It is obvious that sellers have never had it so good as now. Developers pay low rates and have high capital returns. People starting households have never had worse long term obstacles. Open borders has meant Bihar wages in Melbourne but bumper profits for the big end of town. All paid for by the bondage of the young purchaser, pledging his or her life away. No wonder we last replaced ourselves in 1976. The growth corridors in Melbourne are an economic graveyard. No wonder Martin North’s mortgage stress figures are what they are. This is the direct result of having a government and opposition owned and paid for by their sponsors and not representing the people who pay their wages.

  4. A common scenario in times past would be the homebuyers in their young 20’s would have the house paid off in around 10 years off the husband’s wage, while the wife had babies and raised them in the home.

    After this 10 or so years the couple would look at putting on an extra room at the back or side (yes there was spare land for that) or wasting some money of a pool or tennis court. Others went on extensive holidays or even bought a cheap holiday house at Avoca beach or similar.

    Over their lifetime the husband may have sheltered the family for 10%-20% of his wage.

    These days young couples (30’s 40’s and even 50’s) find themselves paying 30%-40% of two wages on rent and/or a mortgage over their entire working life. They have fewer children, no room for extensions, no holiday home, etc.

  5. Lord DudleyMEMBER

    Housing cost less of the older generations’ incomes because they worked harder and earned more money. The young generation are lazy and don’t do anything. If they worked harder and had a go, they’d get a good job with better pay. But they refuse to do that so Australia needs to import as many young immigrants as possible.

  6. Paying twice as much for half less. Light weight construction, waffle pod slabs, smaller land and rooms, kitchens in
    living rooms the list goes on. Too many snouts. Too many cowboys.

    • Agree Buzzy.. you missed the additional cost for OH&S Temp fencing on every build. Money pit. Ironically the main function seems to be to prevent foam waffle pods from blowing off the site in a light breeze and snapping in half.
      False economy..probably don’t factor cost of labour to clean up fence line.
      BTW my stomach rises to my throat each time I see a block of waffle pads parked on garage sized bit of dirt that once served as a cactus retreat / crop & livestock free paddock on Western Hwy en route to Melton. They’re not makin any more land..don’t ya know??

  7. when young people demand a slashing of the mass immigration program, housing will become affordable to them and all once again.

  8. My parents started out with a huge interest burden in late 80’s when they bought a house and it kept on falling so much that they basically paid it off in less than 10 years. I’m assuming they were far from alone as they were only working class at the time.

    When they paid the prices were fairly low but repayments were significant because of high IR’s. Of course, the central bank can keep lowering IR’s from ridiculous highs. But now they are at ridiculous lows and house prices are at ridiculous highs.

    It’s the complete opposite of the above scenario where you could at least hope for lower IR’s to relieve the burden over time.

  9. How do they even measure inflation? Why is inflation measured differently in different countries? Why is it measured the same in every city in Australia? Why is the inflation that one person experiences the same as another eg. why does a a father of 2 have the same inflation measure as a 21 yo single man who has the same inflation as a 65 yo retiree? They don’t all buy the same goods? How is this an objective measurement?

    Why does the central bank treat CPI like it’s a distance that has been measured with laser-like accuracy when it is more akin to someone using a piece of string to measure the distance?

    • Great post. The CPI doesn’t include most housing costs, probably the biggest expense for most families. At least in the cities, the price of a house is mostly for the land under it, and that isn’t covered, just the cost of building the house. Nor does it cover the cost of buying an established house. Nor does the CPI distinguish between luxuries and necessities, so that if less essential goods have become cheaper due to imports from low-wage countries, this can be used to mask the skyrocketing costs of such things as gas, electricity, and health care.

      • The whole thing is a giant fraud. They couldn’t measure it if they wanted to. I know they err on the side of getting a lower number, but even if they didn’t it still wouldn’t be accurate.

        And if they can’t measure it accurately, then adjusting the interest rate according to it is also disingenuous at best and outright fraudulent at worse.

        And forget about MMT altogether since that also depends on an accurate, objective inflation measurement.