Baby boomers' wealth effect hits the retailers
Back in the early Noughties, when the property market was booming, a lot of baby boomers began contemplating their future and realised they hadn't saved nearly enough to allow them to continue in retirement the privileged lives they'd always enjoyed. They decided they'd have to start saving big time.
Back in the early Noughties, when the property market was booming, a lot of baby boomers began contemplating their future and realised they hadn't saved nearly enough to allow them to continue in retirement the privileged lives they'd always enjoyed. They decided they'd have to start saving big time.So what did they do? Went out and bought a negatively geared investment property, of course. Their notion of saving was to borrow to the hilt, then sit back and wait for the lightly taxed capital gains to roll in.If you're wondering why the retailers are doing it tough at present, don't blame it all on the mug punters' conviction that Armageddon starts next July 1 with the carbon tax. Part of the explanation rests with the baby boomers learning the hard way that saving actually requires discipline.Glenn Stevens, governor of the Reserve Bank, has reminded us of the way real consumer spending per person grew significantly faster than household disposable income for the decade to 2005. Over the period our rate of household saving steadily declined until we were actually dis-saving.And this from a nation that hitherto had saved quite a high proportion of income. Why the change? Well, Stevens is no doubt right to explain it primarily in terms of our return to low inflation and low nominal interest rates, combined with a deregulated banking system now more than eager to lend for housing.But there has to be more to it. For most of the decade in question we fought each other for the best house in the block, forcing house prices up and up. At much the same time, the sharemarket was rising strongly as we and the rest of the developed world enjoyed the last phase of the over-confident Great Moderation that ended so abruptly with the coming of the global financial crisis.Over the 35 years to 1995, the nation's real private wealth per person grew at the rate of 2.6 per cent a year, pretty much in line with the growth in real gross domestic product per person.Over 10 years to 2005, however, real household financial assets (including our superannuation and direct shareholdings) grew by 5.3 per cent a year per person. The corresponding growth in non-financial assets (most of which is the value of our homes) was 7.5 per cent.Put the two together and our total assets grew by 6.7 per cent a year. (Our debts grew, too, of course. The ratio of debt to total assets rose from 11 per cent in 1995 to 17.5 per cent in 2005.)So what was it that gave us the confidence during this period to let our consumer spending rip and stop saving any of our household income? One almighty "wealth effect". Capital gain was king.Everywhere we turned we could see ourselves getting wealthier, year after year. The value of our homes rising inexorably, the value of our super swelling nicely. With all that going for us, who needed to save the old-fashioned way? No wonder negative gearing - of share portfolios as well as residential property - was so popular.As Stevens says, that period of debt-fuelled wealth accumulation had to end sometime. We would come to terms with the new world of lower nominal interest rates and readily available credit, loading ourselves up with as much debt as we needed (or a bit more) and calling it a day.The recovery in household saving began well before the global financial crisis. Even so, there's no reason to doubt the crisis did much to accelerate our return to rates of household saving - 11.5 per cent at last count - not seen since the 1980s. For one thing, it reversed the wealth effect.In principle, the behaviour of people of all ages should be affected by the knowledge of what's happening to the market value of their wealth. In practice, however, you'd expect it to have the greatest effect on those approaching retirement - the baby boomers - or even the already retired.Consider it from their perspective. In the months leading up to and during the global financial crisis of late 2008, they observed it smash the sharemarket and take a huge bite out of their super savings. The market has recovered a fair bit since then but it hasn't regained its earlier peak and could hardly be said to be booming.As for house prices, the boom is long gone and prices are, in market parlance, "flat to down". There's no reason to believe they'll be taking off again any time soon.Many boomers have responded to this marked change in their prospects by postponing their retirement. A government-funded survey regularly asks workers over 45 when they expect to retire. In 2009, almost 60 per cent were expecting to retire at 65 or later, up from 50 per cent two years earlier.With little prospect of much in the way of capital gains, it's a safe bet the baby boomers are leading the way in the nation's return to a higher rate of saving.But that doesn't spell the death of retailing. As a matter of arithmetic, it's only when households are increasing their rate of saving - as they are now - that consumer spending has to grow very much more slowly than household income is growing.Once households have reached a rate of saving they're happy with - no matter how high that rate - consumption can resume growing at the same rate as income.But who knows? It may not be until the second half of next year that the punters - including the baby boomers - realise how much Tony Abbott & Co conned them about the depredations of the carbon tax.