Battle of the generations

by Julia Corderoy23 Aug 2016
Australian Broker investigates the dwindling number of young first home buyers and whether Generation Y do, in fact, have it harder than any generation before them.

Generation Y – or ‘Generation Selfish’ – only have themselves to blame for their inability to purchase their first home. This is a comment made by Malcolm Gunning, the head of Sydney real estate network, Gunning. Addressing the historically low levels of home ownership, Gunning stated that Generation Y are at fault for sabotaging their own chance at getting onto the property ladder.

“More and more we are seeing a victim mentality associated with the high cost of property, yet this 'generation selfish' sees wide screen TVs, designer clothes, international holidays and eating out as every day essentials. They simply won't do what is necessary to cut their lifestyle in order to save a deposit,” he said.

“They also aren't prepared to invest in a stepping stone property, in a less desirable location, they want the Surry Hills pad, right now and won't modify their expectations.”

First home ownership is dropping, and it is dropping to alarming levels. The latest figures from the Australian Bureau of Statistics reveal that first home buyers as a proportion of owner occupiers is at its lowest in more than a decade. But whilst the level of first home ownership is not up for argument, there has been plenty of controversial debate around the idea that this is because the current generation of first home buyers, Generation Y, have it ‘tougher' than their Baby Boomer parents.

Depending on who you speak to, Generation Y faces an uphill battle of sky-rocketing house prices, a robust investor market and sluggish wage growth; or they face the same struggles every generation before them faced as first home buyers – it’s never easy to purchase your first home. House prices may have risen, but interest rates are also at record lows.

And Gunning certainly isn’t alone in his hard opinion, suggesting Generation Y first home buyers aren’t as savvy as their parents. This rhetoric is even coming from Australia’s politicians. Former Treasurer Joe Hockey’s advice to first home buyers was to “get a good job that pays good money”, he told a media conference in Sydney last year.

However, the generational debate may now be settled with a new report offering the ultimate checkmate. The latest edition of the Household, Income and Labour Dynamics in Australia Report (HILDA) was released this month and its data tells a different story - that Generation Y do in fact have it tougher than their Baby Boomer parents. 

The end of the Great Australian Dream?
The comprehensive HILDA survey is a household-based panel study which began in 2001 and has so far surveyed over 25,000 individuals and over 9,500 households. The latest report indicates that home ownership in Australia is indeed declining, but is declining not just for first home buyers, but for everyone. All but one age group experienced falls in home ownership, and across all states (excluding Tasmania, the Australian Capital Territory and the Northern Territory due to small sample sizes in these jurisdictions). 

In 2001 when the survey began, 68.8% of all Australian households were owner occupied, but by 2014, this had fallen to 64.9% of households. 

However, what the report more tellingly reveals is that the decline in home ownership has become significantly concentrated on those aged under 55, and in particular those aged under 45.

Home ownership among persons aged 25–34 declined from 38.7% in 2002 to 29.2% in 2014, with much of the decline occurring between 2010 and 2014. Not surprisingly, this period corresponds with the current house price growth cycle which has seen Sydney house prices climb 59% and  Melbourne house prices up 40%.

Among persons aged 35–44, home ownership declined from 63.2% to 52.4% from 2002 to 2014 and among persons aged 45–54, it declined from 75.6% to 67.4%. 

The only age group not to experience a fall in home ownership was those aged 65 years and over. However, they didn’t experience an increase either. Over the 12-year time period, there was essentially no change in home ownership among this age group. 

The Great Australian Dream may be more of a dream than ever before, but it appears to have become even further out of reach for the younger generation of home buyers.

Where did the dream go?
So why is home ownership, particularly for Generation Y, in trouble? Yes, house prices are in a growth cycle and the soaring cost of real estate is dominating headlines, but the HILDA report reveals that the cost of entry-level housing, in particular, is more expensive than ever. 

According to the report, the 10th percentile – or the least expensive homes on the market – increased in value by 108% between 2001 and 2014, while the 90th percentile increased by less than half of that at 47%. The median home value increased by 76.5%. 

The inequality in home prices is even more evident when you compare the ratio of the 90th percentile to the 10th percentile. In 2001, the ratio of the 90th percentile to the 10th percentile was 5.01, meaning the most expensive houses were more than five times the value of an entry-level property. In 2014 this ratio had declined to 3.57. 

“An implication of this finding is that housing at the ‘affordable’ end of the distribution appears to have become relatively less affordable between 2001 and 2014,” the report stated.

And at the same time as entry-level house prices are rising, household incomes are dropping. Between 2001 and 2014, median household income increased by $18,027, however, this was very much concentrated on the 2003 to 2009 period. Between 2009 and 2014, the median household income fell slightly. 

Unsurprisingly, this combination of high house prices and falling incomes has translated into disappointing home equity – the difference between the value of the home and debt owed on the home. Whilst you would expect the mean of home equity to be lower than the mean of home value, the HILDA report warns that the growth in home equity is “substantially lower” than the growth in home values. Mean home equity grew by just 52.7%, whereas the mean home value grew by 65.3%. 

And which age group is suffering the most? Those aged 25-34 years: Generation Y. This demographic was the only age group to see a decline in median home equity.

Between 2002 and 2014, median home equity for Generation Y declined by 7.9%, indicating that their debt has grown significantly more than the value of their homes. The next closest group was those aged 35-44, who saw a 10.9% increase in median home equity. Those aged over 55 years saw an average increase of 45.9% in home equity, despite higher house prices. 

What does this mean?
Declining home ownership amongst our younger generations is not good news for anybody. Damian Percy, Adelaide Bank’s general manager of third party mortgages, told Australian Broker there are several aspects to this problem that will ultimately impact the Australian economy. 

“Firstly, pretty well all the modelling that has been done on paving the way to a self-funded retirement assumes that the retiree owns their own home. Secondly, homeowners spend more on goods and services bettering their homes and gardens and stimulating economic activity.  

“...They are also building up equity in their home, which potentially they can borrow against to fund additional property purchases such as an investment property or shares. Australians have traditionally viewed home ownership as the bedrock of financial security.”

Taj Singh, director and co-founder of First Home Buyers Australia, an organisation founded to support and educate first home buyers, said the declining rates of home ownership among younger generations will also affect property investors. And with the HILDA report showing that residential property investment is concentrated among those aged 45-64 years who also earn in the top two quintiles, Baby Boomers should take note.

“As more and more people are forced to rent it will drive competition in the rental marker in the more popular areas; renters usually like to rent where it is convenient for their work or lifestyle.

“Consequently, the more unpopular areas may see less rental demand, which may impact on an investor’s ability to service the debt on their investment property,” Singh told Australian Broker.

Percy added that housing stock will also get older, “meaning that newer, more energy and space efficient housing is less likely to be built in its place.”

What now?
Addressing the situation will take a comprehensive, multi-pronged approach, starting with the government, according to Percy. 

“First and foremost, governments at all levels should stop making it worse: the federal government should review tax policy, particularly the interaction of negative gearing and capital gains discounts, that encourages speculation in existing housing stock,” he told Australian Broker

“State governments need to reduce their reliance on property taxes and their enthusiasm for growth boundaries and local government needs to reduce the degree of difficulty in adding to housing stock – including the front-loading of infrastructure costs on the development of greenfield sites, and therefore first homebuyers.”

On top of reviewing tax policies and reliance, Percy said the government also needs to encourage more employment opportunities in regional areas and in cities like Canberra and Adelaide.  

“We primarily have a ‘supply problem’ on the East Coast and the reasons for this vary in each capital city. We simply haven’t built enough houses over the past decade or so. The increased demand is making it very tough for first home buyers and taking the population pressure off the big cities will help Gen Y. But we should also make it easier for older Australians – who were late to the compulsory superannuation regime with low super balances – to move to a regional areas.”

According to Singh, addressing the situation requires first home buyers to receive a significant leg up when it comes to tax concessions.

Firstly, he said, interest deductibility on existing dwelling purchases needs to be reduced from 100% deductible to 50% deductible, whilst retaining 100% deductibility on new dwelling purchases.

Secondly, a CGT discount system tiered by scale also needs to be introduced so investors don’t receive a full 50% discount until after 36 months. In addition, Singh argues that first home buyers should also be provided with a 50% stamp duty discount on existing dwellings and 100% discount on new dwellings.

On top of tax concessions, Singh is petitioning for first home savers accounts to be reintroduced, “with enhanced features such as an ability to salary sacrifice pre-tax wages, no tax on investment earnings, a reduced three-year minimum investment rule and an ability to invest in assets other than cash such as managed funds”.

But when it comes to the actual home loan, Singh said lenders and mortgage brokers also play an important role in addressing housing affordability for first home buyers.

“By offering flexibility to first home buyers, [lenders] can help ease the affordability crisis by offering honeymoon periods (for interest rates or repayments) or by offering loans with interest free portions. 

“Lenders Mortgage Insurance (LMI) is also quite a significant cost to a first home buyer... Some lenders could look at reducing this burden where first home buyers have saved close enough to 20% of the home value.”

Mortgage brokers can play a crucial role, said Singh, due to their independence and access to a range of bank and non-bank lenders.

“Mortgage brokers can also determine borrowing power and eligibility for a home loan, which allows first home buyers to determine which region or suburb would be within their budget,” he concluded.