The cost of buying a home has increased by 130 per cent over two generations and Generation X is bearing the debt burden

 In Home News Section, Uncategorized

The cost of buying a home has increased by 130 per cent over two generations, leaving Generation X – those aged 41-56 years old – considerably worse off than the two generations before them and at risk of a looming debt disaster, a new report suggests.

The discussion paper from Per Capita, “Generation Stressed”, says the situation will get worse unless the federal government makes drastic policy changes such as removing or limiting negative gearing and axing the 50 per cent capital gains tax discount.

“The federal government could axe tax incentives for investors, particularly the Capital Gains Tax Discount, and remove or limit negative gearing,” the paper says.

“Should interest rates rise without concomitant wage increases, recent mortgage holders will suffer significantly as their mortgages become unaffordable.”

The paper examines the total cost of a mortgage as a proportion of wages over the 30-year life of a standard home loan.

It compares home prices, mortgage rates, and wage changes to see what proportion of a median income would go to covering the cost of the median mortgage, and finds a Generation X family’s debt has been declining much more slowly in real terms than that of previous generations.

A Generation X family that bought in 2000 and has about nine years left to go on the mortgage, will spend 25.5 per cent of its gross income on servicing mortgage debt, the report says.

A Baby Boomer family buying a home in 1985 had an average repayment cost over the life of the mortgage of 19.5 per cent of its gross income.

While for the “Silent Generation” family buying in 1970, the average repayment cost over the course of the mortgage was 11.2 per cent of gross income.

 “We estimate the Gen X family is paying $1,425 per month on their mortgage in 2021, “says report author Matt Lloyd-Cape.

“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.”

‘Anaemic’ wages growth worsens the problem

The discussion paper argues that the Consumer Price Index (CPI), by treating the largest cost most families will ever take on (buying a home) as an asset investment rather than as a daily expense, fails to adequately account for the increased cost of living for mortgagor households over the past 50 years.

“Given that Australia’s social welfare model is predicated on mass home ownership, factoring the total cost of a home purchase must be incorporated into cost-of-living measures,” Mr Lloyd-Capes explains.

The report also points out how, over the past decade, wages have been largely stagnant, while in previous decades they have increased faster relative to inflation.

Australians have experienced “anaemic median nominal wage growth of roughly 3 per cent, with many people effectively seeing no increase to their pay packet”.

“By comparison, in the 1970s — although inflation was extremely high at 9.8 per cent — nominal wage growth outstripped inflation significantly with an average annual increase of around 13 per cent,” it says.

“So, while first-time buyers prior to the house price boom from the late 1990s onwards certainly had far lower house prices, and therefore smaller deposits to contend with, their monthly payments were increased by far higher interest rates.

“Late Gen Xers, Millennials and Gen Zeds, on the other hand, struggle longer to save the deposit for ballooning house prices, but then experience relatively lower interest repayments.”

The ‘debt overhang effect’

Rising housing debt burdens have significant macroeconomic and microeconomic implications.

“This huge increase in real household debt produces a large ‘debt overhang effect’, reducing consumer spending by 0.3 per cent with every 10 per cent increase in debt,” the report says.

It notes that even the RBA estimated that consumer spending at the household level would have been higher if household debts had not ballooned over the past two decades.

And it suggests that “as house purchases become less affordable, it is more common that parents of first home buyers experience a cost of living hit if they assist their children with the purchase”.

“This occurs though re-mortgaging, downsizing to release equity, taking on default risk by standing as guarantor, or providing living space to their children while they save for their deposit.”

The report cites data from Digital Finance Analytics that estimates that the proportion of first-time buyers receiving help from their parents is now 60 per cent, up from less than five per cent in 2010, while the average parental financial contribution has risen from less than $25,000 to nearly $90,000 over the same period.

“This is a crucial argument against dismissing increased debts by arguing that they are offset by increased assets and raises serious concerns for the sustainability of Australia’s cherished commitment to intergenerational mobility,” the report suggests.

“Home ownership is declining generationally, housing costs are up for the poorest households, and mortgage debts are not being offset by rising asset prices.”

By business reporter Nassim Khadem (Original ABC Article)