Aussie Property: Generational Crunch Time Approaches

Wages in Australia need to rise.

If they don’t, spending will stall and economic growth will suffer.

But at the same time, Aussie property prices are at record highs and interest rates are at record lows.

So, if wages rise too fast, then interest rates could follow suit. Which in turn would cause increases in mortgage stress, potential property price falls and a reduction in spending in the real economy.

The exact same outcome as with no wage growth.

Clearly, it’s a conundrum.

Unfortunately for you and me, it’s a problem for politicians to fix.

And to them ‘fix’ means ‘get elected’.

As always in a democracy, it’s ‘the numbers’ that will dictate what action is taken. Not the economics or the research.

It’s one reason that negative gearing — a blatantly unfair advantage for property investors — has remained despite the evidence that it’s contributing to a property bubble. All to the detriment of first time buyers.

It’s the numbers that have kept this policy in place.

Because for years the policy winners outnumbered the losers. After all, Australia has historically been a property-owning country.

But over time houses in Australia have become a speculative asset, rather than an inclusive part of the ‘Great Australian Dream’.

According to a recent HSBC survey, only 26% of Australian millennials own a home.

Compare that to countries such as Mexico and China where the figure is 70% for the same 21-36 age group

But this generation might decide to act. And if they do, they could have the numbers to do something about it.

The influential boomer generation are now leaving the work force en masse. At the same time, the oft-maligned millennial generation are set to swarm into the workforce.

We’re reaching a pivot point in Australian society…

The numbers game

Generational politics are not as clear cut as you might think.

Plenty of boomer parents worry about the job and home ownership prospects for their kids.

Gen X’s can fall either side of the millennial-boomer divide. Some are property owners with large debts who are keen to let the same old story play out as it did for their parents. Others are permanent renters feeling they have missed the boat.

And there are some millennials who are beneficiaries of their boomer parents’ wealth. They’re helpfully assisted by Mum and Dad onto the property ladder through the spoils of a multi-decade property boom.

But make no mistake. The divide between the generations is real.

Your average millennial is leaving university with a fairly hefty debt. Only to enter a competitive workplace of low wage growth and weak unions (industry exceptions aside of course).

It’s a steep mountain to climb.

And although starting off has never been easy — and it’s not meant to be easy — it’s still fair to say no generation has had to start off at such a disadvantage when it comes to buying a roof over your head.

That’s if you’re a person who wants to (or in some cases, has to) stand on your own two feet. And not rely on the proverbial ‘bank of Mum and Dad’.

Boomers on the other hand are generally well-off, reaching their retirement with property assets and decent superannuation balances.  I say generally because of course, not everyone fits comfortably into such broad stereotypes. But according to the economic figures, this is generally true.

Furthermore, through their combined voting power the boomer generation has created a tax and welfare system that both protects their super savings from a tax point of view, and their home from an aged pension point of view.

Money held in super at retirement phase is mostly tax free. And a person living in a multi-million dollar property can still get the maximum aged pension, as the principle residence is not part of Centrelink’s calculations.

Leaving aside the fairness of such a system for now, the question becomes two-fold. Is it a sustainable system? And do ‘the numbers’ allow anyone to change it?

Suffice to say that the growing budget deficit suggests it’s not sustainable. Especially with the rise in health care costs coming as the boomers age. 

Negative gearing set to end

However, the numbers suggest that a game changing moment is upon us.

And it’s all to do with the evolving make-up of Australia’s work places.

By 2020, boomers will represent only 17% of the work force. Millennials on the other hand will make up 35%.

If we look at the middle group, the Gen X’s which make up 36% of the work force, they represent the swinging vote in some respects. Whether they’ve benefitted or been left behind in Australia’s boom might determine which policies they vote for.

Broadly speaking, that might depend on whether they are a mortgage holder or not.

In my opinion, this puts the policy of negative gearing under the spotlight.

The days of tax payers subsidising property investors could be set to end.

Consider the numbers again…

Millennials eager to get into housing can now ally with boomers who are now retiring and no longer benefit from such a policy.

As the budget savings generated could be put into services boomers now care about — such as health — this could be a winner for both generations.

In the past such a move wouldn’t fly.

But now it could.

Of course, there is the knock-on effect on house prices to consider. But again, a cooling property market wouldn’t affect as many people as it would have in the past.

To be clear though, there’s a big difference between a cooling property market and a crashing one which would affect the wealth of many.

That’s why it’s a tightrope for politicians when they enter into this territory.

But a tax cut too!

I started off by talking about wage rises. I don’t think we’ll see this in a hurry. But we could get the next best thing.

A personal tax cut.

This is a de-facto wage rise for workers at no cost to business. You can see why the liberals like this idea.

And the demographics suggests that Gen Xs and Millennials could get behind such a policy depending on how it’s put together.

A Trump-esque trickle down tax policy? Probably not. But a genuine middle income personal tax cut could be a vote winner.

Of course, there’s the little matter of the budget deficit to consider. A consideration which appears to have gone out of fashion these days. I can’t remember the last time I heard the phrase ‘debt and deficit’.

But my feeling is that change is coming as politicians start to realise ‘the numbers’ are changing too.

The best-case scenario is a chance for policy makers to really focus on intergenerational continuity. A win-win for both sides of the fence. As opposed to a continuing focus on partisan societal differences.

That requires a level of political bravery. And smart thinking to get the balance right.

I’ll hope for this.

But when it comes to politicians, I’ll never have money depending on it.

Good investing,

Ryan Dinse,
Editor, Money Morning

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

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