Property boom widens generational wealth gap

By NZPA

Saturday 17th July 2004

This week Melbourne newspaper The Age reported the findings of a study it commissioned analysing the effect of Australia's property boom on the wealth of its citizens.

The reports made interesting reading from a New Zealand perspective. Here there has been a similar, if not quite as long running and intense, property boom. We also share many of the same attitudes to home ownership.

"The great Australian dream has been founded on the humble premise of home ownership," The Age said in an editorial.

"Our egalitarian aspirations, our security and our sense of identity can all be traced, at least in part, to the national ambition to pay off a mortgage."

While The Age reported the boom for the most part benefited Australians, the survey also found it contributed to a widening gap between rich and poor.

Those who could afford to buy property during the boom reaped the rewards, while for those who couldn't, the dream of owning their own property slipped further out of reach as prices rose.

Another key finding of the study by Canberra University's National Centre for Social and Economic Modelling was this gap was widening along age lines.

People in older demographic groups with higher home ownership rates, unsurprisingly benefited most from the boom.

Commenting on the research, chairman of Australia's National Summit on Housing Affordability, Professor Julian Disney, said this was resulting in "intergenerational inequity" and was cause for alarm.

Across the Tasman, recent New Zealand research confirms that home ownership here is decreasing among the young.

This was noted in a 20-year study of housing commissioned by the Housing New Zealand-funded Centre for Housing Research Aotearoa New Zealand (Chranz), published last month.

The study by research company DTZ showed an overall decline in home ownership from 73.8% in 1991 to 68% in 2001 was particularly concentrated among the young.

But only looking as far as 2001, the study gives no indication of the present property boom's effect on home ownership rates.

Real Estate Institute of New Zealand president Graeme Woodley believes the property boom has made things more difficult for young home buyers.

"Certainly as the market moves up and people try to raise a deposit, the one sector of society that has had big difficulty in the last couple of years with the way the market has gone has been the first home buyers."

How much more difficult is debatable.

Westpac Bank economists last month said average house prices were now 6.5 times bigger than the average yearly wage, compared with an average of just 4.5 times during the past 30 years.

But Infometrics economist Andrew Gawith said this was partly "a reflection of the increased debt servicing capacity of households as interest rates have fallen".

The DTZ study found that banking sector deregulation in the 1980s had resulted in credit becoming more available while interest rates had fallen.

"If you look at the debt servicing costs relative to people's incomes it's no higher than it was in the early '90s, so I spend less time working to service my debt," Gawith said.

Author of the DTZ study, Ian Mitchell, said lower rates of home ownership may also be a function of "a higher standard of consumption and lifestyle pursued by today's younger people".

While the increased availability of credit and low interest rates had fuelled property price increases they had also boosted other forms of household debt as people took advantage of loans to fund overseas travel, cars, and other goodies.

"It's easier for people to go out and consume in advance than it was 25 years ago," Mitchell said.

Higher consumption expectations "may mean that regardless of entry level cost, home ownership is pushed out for this younger group".

In Australia, Prof Disney said young people's wealth creation and entry to the housing market was hindered by recently introduced compulsory superannuation and a loan system for higher education.

But the Australian student loans regime is arguably far less burdensome than New Zealand's.

REINZ's Woodley said student loans were an issue for young home buyers.

"It's a total debt situation for the person. Those that I've spoken to that have student debt recognise it as an impediment to them being able to buy a first home."

In May, Housing Minister Steve Maharey, who also has responsibility for tertiary education, released a housing strategy discussion document that noted both the drop in home ownership among the young and that student debt appeared to be a factor.

Many baby boomers benefited from state assistance when they first bought homes. Capitalisation of family benefits and low interest loans to those on low incomes helped young buyers into their first homes.

But since the early '80s state housing policy has changed to direct fewer resources at those with the greatest need.

Woodley said he'd like to see a return to some form of state assistance for first home buyers.

"I find it really unfortunate...that we're not doing anything for example for a young couple who perhaps have both gone to varsity, both got student loans, both resisting starting a family until they've put themselves in a reasonable financial position."

But young people also face another challenge -- competing for available houses with equity-rich baby boomers looking for investments. Many have been levering the extra value out of their homes to buy second properties as investments.

As the baby boomers make the most of what they have, Mitchell says an increasingly important question is : "Will there be a significant transfer of wealth between generations ... will the baby boomers consume it or will they pass it on to their children?"

In its winter Financial Editor report, fund management company Spicers recently said the baby boomers' growing wealth would not necessarily flow through to their children.

"With people living longer, the amount of time spent in retirement is increasing significantly," Spicers said.

"With better (but more expensive) healthcare and a more positive attitude towards enjoying later years, we are finding retirement expenditure is increasing, leaving less for the future generations. It appears we are well into the Spend Kids' Inheritance (SKI) generation."

Meanwhile, Mitchell said more research was needed on the social implications of lower home ownership rates on our society.

"For example, a structural fall in home ownership rates is likely, over time, to lead to higher housing costs for retired people and higher fiscal costs for government through increased expenditure on accommodation supplements."

But at the end of the day sociological trends may be the most significant factor in declining home ownership among the young.

It's no secret that people these days are putting off having children until later.

The Australian research has shown the single-most important factor determining whether young people buy their first home is that they are in a relationship and going to start a family.

Have you seen the NZ Property Magazine - written for property investors? If you would like a trial copy send an email to propertymag@goodreturns.co.nz">propertymag@goodreturns.co.nz with your postal details.

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